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What next for sterling?

4 minute read

Sterling has had a bumpy ride in recent months, not helped by political uncertainty and the Brexit vote delay. We assess the outlook for the pound.

Who's this for? All investors

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

What you’ll learn:

  • What impact the delay to the Brexit vote had on sterling.
  • Which factors other than politics affect the pound.
  • What currency movements mean for investors.

The pound plummeted to a 20-month low on 10 December after the Prime Minister announced that a parliamentary vote on her Brexit deal with the European Union would be postponed, before recovering some of its lost ground.1

Continuing political uncertainty has weighed heavily on sterling in recent months, and there are concerns that a disorderly no deal Brexit could result in further losses.

If a deal is agreed, it’s possible that some stability could return to the pound, although there are no guarantees that this will happen.

The FTSE 100 index of Britain’s biggest companies also faltered following the delay to the vote on the proposed Brexit plan, but was helped by sterling weakness2 as many of the multinational companies listed on the FTSE 100 index earn much of their revenues overseas. When the pound falls, this boosts their foreign profits when they are converted back into sterling.

Conversely, many smaller companies don’t tend to benefit from a weaker pound, as it reduces the buying power of their British customers and raises their input costs in relation to sales made in the UK.

Where next for the pound?

No-one knows for certain which direction sterling will move next, but investors should prepare for continuing volatility whilse political and Brexit uncertainty continues.

It’s important to remember that politics isn’t the only factor which impacts on currency movements. Inflation also plays an important role in the value of the pound, with rising living costs putting further downward pressure on the currency.

The UK’s inflation rate reached 3.1% in November 2017, according to the Office for National Statistics, but it has since dropped back to 2.4% in October 2018. This is still well above the Bank of England’s 2% inflation target. A Bank of England survey in December 2018 found that the British public expect inflation to be at 3.2% in a year’s time.3

Interest rate expectations also influence currency movements. When interest rates are very low, this tends to deter foreign investment, therefore reducing the pound’s relative value. Conversely, when rates are rising, this encourages foreign capital, boosting the value of sterling.

If the pound continues to come under pressure in months to come, the Bank of England may feel compelled to raise interest rates to make it more attractive to foreign investors.

Prepare for uncertainty

At the moment, the only thing that seems certain is that much uncertainty lies ahead.

This means that investors may want to consider spreading their risk internationally, rather than focusing solely on the UK.

Adopting a global approach means you can not only benefit from a much broader range of stocks, but also that if sterling weakness continues, any income and gains will be worth more when translated from dollars or euros into pounds.

If there is a pick-up in sterling’s value going forward, although this would reduce the value of international investments, it would mean you may be able to purchase more foreign currency-denominated investments with your pounds. This does, of course, depend on the listed price of foreign shares in their original currency.

It’s important to remember that even if currency movements benefit you, any gains made could be offset if the listed price of your foreign stock falls.

If you are considering investing globally, you must be prepared to accept the risks involved, and that you could get back less than you put in. For investors seeking income, global income funds that search for yields overseas include the Janus Henderson Global Equity Income fund and Jupiter Ecology fund, but there are plenty of other options available. Funds for investors wanting growth rather than income include Janus Henderson’s Global Sustainable Equity fund, which invests in global companies whose products and services are considered to contribute to positive environmental or social change.

Remember that our referring to these funds does not constitute advice or a personal recommendation to invest in these or any other investment. If you’re unsure where to invest, seek professional financial advice.

Please bear in mind that investments can fall as well as rise and you may get back a less than you invested.

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The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.

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