Clare: Hello, I'm Clare and welcome to Smart Investor the show that can help you get the most from your investments. Please be aware that although we can't offer personal advice we're hoping each episode will provide you with the insight you need to make you a smarter investor. If you've been on holiday abroad you'll have noticed how exchange rates affect the amount of spending money you have. The stronger the pound is against other currencies the more money you have to spend overseas while the weaker it is, the more expensive your holiday costs will be.
Here are the results from our recent Twitter poll where we asked our online community whether the weaker pound had affected their holiday plans this year. So that's what our online audience have thought but would everyone else agree? Once again we took to the streets to find out.
Person 1: The exchange rate's pretty poor so it's definitely affecting where we're choosing to go, especially in Europe.
Person 2: I do go away quite a lot, so my family live in Majorca so I've been out in Majorca a couple of times this summer and I guess the biggest affect on me is that you're getting less euro for your pound, essentially, aren't you?
Person 1: Yeah, I've been holidaying in Britain for the past couple of years because of budget. And because, yeah, exchange rate adds to that budget.
Person 3: Going to the US now would be a bit more expensive than it was before so, like, I'll pick somewhere in Asia or somewhere within Europe where it's closer and the pound is actually still a stronger currency than the others.
Clare: But it's not only foreign holidays that are impacted by the value of sterling. It can also have a big effect on your investments and this can be positive or negative, depending on what you invest in. Just as your money doesn't go as far on a foreign holiday a weaker pound means you won't be able to buy as many foreign currency-denominated investments whether you invest via a fund, or directly in international shares. However, if existing overseas holdings are sold their value will be higher when converted back to sterling. That doesn't necessarily mean you'll have made a profit as it will depend on whether the value of the shares have risen or fallen in their original currency. Another way the value of the pound can impact investment returns for UK investors relates to how and where a company makes its money. Firms that primarily export the goods they produce can benefit from sterling's weakness because it makes their products cheaper for foreign buyers to purchase. Similarly, companies that derive a large proportion of their earnings overseas can see a boost to profits when that money is converted back to sterling. These factors have helped the performance of the FTSE 100 stock market index recently as the companies that make up the index earn more than 70% of their revenues overseas. And some UK firms even pay their dividends in a foreign currency. Around 40% of UK firms listed on the FTSE 100 and FTSE 250 pay their dividends in US dollars. So when converted back to sterling the value of the dividend payment is higher if sterling is weak than when it is strong. However, it's important to note that currency fluctuations aren't the only thing that can impact your investment returns.
Share prices rise and fall for all sorts of reasons so remember that the value of your investments can go down as well as up and you may get back less than you originally invested. If you'd like to learn more about how currency movements can influence markets and investments, visit our website. Thanks for joining us and I hope you'll join us again soon on Smart Investor.