Question
In light of the Pound falling against other currencies how will the U K investor fare with savings held in ISAs, holding funds of bonds/currencies or equities invested abroad?Answer
Currency movements affect investments in two main ways.
At its most basic, any investments held in another currency will change in value when converted back into pounds following a change in the exchange rate. For example, suppose you own $1,000 of US shares, at an exchange rate of £1 = $1.5, the shares are worth £667. If the exchange rate moves to £1 = $1.6 (i.e. a stronger pound) the shares will decrease to £625 while an exchange rate of £1 = $1.4 (i.e. a weaker pound) would see the shares increase to £714.
The more complex half of the answer is how do currency movements affect the actual investments themselves?
An obvious area is imports and exports. British companies that export should benefit from a weak pound as it make their goods less expensive overseas and vice-versa when the pound is strong. And British companies that rely on imports (either raw materials or goods to sell) will have to pay more when the pound is weak and less when it's strong. In practice some companies might protect against shorter term currency movements by hedging, but even then it's unlikely they'll escape the impact of currency movements altogether.
If you own shares in foreign companies that trade with Britain then the opposite will be true, i.e. a weak pound reduces the cost of British imports but increases the cost of their exports to Britain.
A strong currency means demand for that currency is high, usually a sign of high export demand and/or belief the country is financially robust. If the latter this might bode well for government bonds, i.e. gilts in the UK, and vice-versa when the currency is weak.
In practice there are obviously many other factors that could come into play, but I think those outlined above will likely have the biggest impact on your investments. Predicting currency movements is no easier than predicting stockmarkets, but it's nice when both move in your favour.
In light of the Pound falling against other currencies how will the U K investor fare with savings held in ISAs, holding funds of bonds/currencies or equities invested abroad?Answer
Currency movements affect investments in two main ways.
At its most basic, any investments held in another currency will change in value when converted back into pounds following a change in the exchange rate. For example, suppose you own $1,000 of US shares, at an exchange rate of £1 = $1.5, the shares are worth £667. If the exchange rate moves to £1 = $1.6 (i.e. a stronger pound) the shares will decrease to £625 while an exchange rate of £1 = $1.4 (i.e. a weaker pound) would see the shares increase to £714.
The more complex half of the answer is how do currency movements affect the actual investments themselves?
An obvious area is imports and exports. British companies that export should benefit from a weak pound as it make their goods less expensive overseas and vice-versa when the pound is strong. And British companies that rely on imports (either raw materials or goods to sell) will have to pay more when the pound is weak and less when it's strong. In practice some companies might protect against shorter term currency movements by hedging, but even then it's unlikely they'll escape the impact of currency movements altogether.
If you own shares in foreign companies that trade with Britain then the opposite will be true, i.e. a weak pound reduces the cost of British imports but increases the cost of their exports to Britain.
A strong currency means demand for that currency is high, usually a sign of high export demand and/or belief the country is financially robust. If the latter this might bode well for government bonds, i.e. gilts in the UK, and vice-versa when the currency is weak.
In practice there are obviously many other factors that could come into play, but I think those outlined above will likely have the biggest impact on your investments. Predicting currency movements is no easier than predicting stockmarkets, but it's nice when both move in your favour.
Read this Q and A at http://www.candidmoney.com/questions/question309.aspx
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