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Falling Pound and the effect on investments

Falling Pound and the effect on investments

This month has seen the FTSE 100 reaching a new record high but seeing the pound dropping below $1.21.

Rise in FTSE, drop in Sterling

The post-referendum slump in sterling has seen multinational companies listed on the FTSE 100 being boosted, with many benefiting from earnings in currencies that are stronger than the pound.

Some of the key reasons for the recent rise in the FTSE is the weakness of sterling, this is causing a lot of investment from abroad, in addition of the FTSE100 companies 75% of their income is generated overseas so the weakness of sterling means they will be more profitable, the wider FTSE 250 generates 55% of its income overseas.

A further problem is that there is little chance of interest rates increasing following the vote to leave the EU, therefore more investors are moving into the market chasing yield.

The FTSE 100's international companies earn much of their revenues in dollars, a weaker pound typically helps exporters.

Good News for Income Paying Stock

Brexit may be bad news for the economy but it has delivered an unexpected boon to income paying stocks.

Brexit has helped some investments companies who have most of their costs in sterling and revenues in dollars; resulting in boosted profits and being in a stronger position to pay dividends.

Sectors such as energy stocks and house builders are currently displaying yields higher than their long-term average because of share price depression. Commodity falls and Brexit have hit these stocks meaning the yields have been inflated.

A Diverse Portfolio

With funds offering higher returns and interest rates low investors may be considering taking on more risk and putting some of their savings into funds and shares.

Individual shares are riskier as if the company collapses you have more to lose. Funds typically have 50 to 60 different shares, so if one goes down the impact is much less.

A diverse portfolio would have been well positioned for Brexit. One that has a percentage of assets invested in companies that pay their dividends in either US dollars or euros.

And one with the shadow of Brexit where an increased proportion of your portfolio was invested in overseas stock.

It pays not only to balance the risk of your portfolio but for an experienced financial adviser to regularly review your asset allocation.

The strength of the FTSE 100 is reflective of the fact that Brexit hasn't had too much of an impact on the UK economy so far.

Though it is very likely that volatility will persist with both the Italian referendum (with their own banking crisis) and the upcoming US elections together with the Government announcing to trigger Brexit in March.

Although we understand investors' concerns, you should not need to make dramatic changes, provided you have a well-diversified portfolio.

Please give us a call if you'd like us to discuss your current investment Portfolio.

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Henson Crisp Limited

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