How investors can benefit from the stronger pound

When the value of the pound is in the news our first thought is often about what it means for the cost of our next holiday. But sterling’s ups and downs also influence the price of overseas investments – and, perhaps more surprisingly, the value of some British shares too.

Want to buy American tech stocks? They’ve just got a lot cheaper

The strengthening of the pound over the past three months has combined with the recent sell-off of shares in America’s technology stocks to create what could be a buying opportunity for British investors.

When sterling rises against the dollar, each of your pounds will buy more of the dollars needed to invest in US shares, so your money goes further even before we consider the steep falls in some American tech stars over the past few weeks.

Nvidia shares, for example, peaked at $135.58 on 18 June but at the time of writing the shares stand at $122.59. That is a fall of 9.6%. However, over that period the pound has strengthened from $1.27 to $1.29, so in sterling terms one Nvidia share cost 107p on 18 June but is worth just 95p now, a fall of 11%.

The same is true, although to a lesser extent, for the other ‘Fab Five’ tech stars. Since Microsoft’s shares peaked on 5 July they have fallen by 4.9% in dollars but 5.6% in pounds; the equivalent figures are 6.8% and 7.5% for Amazon since its peak on 5 July, 9.5% and 10.2% for Meta (Facebook) since it peaked on the same day and 4.9% and 5.4% for Alphabet (Google) since a peak on 10 July.

The pound has also gained against the euro, so those interested in investing in European shares can also benefit. For example, shares in LVMH, the luxury goods conglomerate, peaked on 14 March at €872.80 but since then have lost 23.9% to stand at €663.80. Over that period the pound has risen from €1.17 to €1.19, which makes the fall in LVMH shares in sterling terms 25.3%.

Shares in ASML, the Dutch company that makes the machines that high-end chip manufacturers depend on, have also fallen, from a peak of €1,002 on 10 July to €855.70 at the time of writing. This is a decline of 14.6% but in this case sterling is unchanged against the euro so there is no amplification of the fall in the share price courtesy of the exchange rate.

Whatever the possibility of buying a bargain now, the wider point is that investors can help themselves if they always bear currency exchange rates in mind when they invest in overseas assets – and even, as we will explain now, when they buy or sell some British-based investments.

A strong pound is not so good for the FTSE 100

A strengthening currency is a double-edged sword for investors: it’s great if you want to buy dollars or euros, in order to buy assets denominated in those currencies, but it’s not so good if you want to sell them. And sell dollars or euros is exactly what has to be done if the overseas earnings of an international company such as BP or Shell are to be turned into sterling so that British investors can receive pounds they can actually spend. Each dollar BP earns will buy fewer pounds if sterling has appreciated.

Not only will this typically mean lower earnings and dividends from these companies in sterling terms but the markets typically mark their share prices lower too. This is why the FTSE 100, after a brief moment of shock, actually rose after the unexpected result of the Brexit referendum: the pound had immediately sunk significantly and investors soon realised that this was actually good news for the overseas earnings of the international companies that dominate London’s blue chip index.

The negative influence of a strong pound on some British stocks could to some extent counteract renewed optimism about London-listed shares as investors worldwide digest the fact that the UK increasingly looks like an island of political stability in an unpredictable world. One way to benefit from a bounce in British stocks without the risk that a strong pound will work in the other direction is to focus on London’s smaller, more domestic companies, which make their money in sterling in the first place.

Although the FTSE 250 index of medium-sized stocks is generally seen as more focused on the home economy, a large proportion of its collective profits is still made overseas, so investors need to select their holdings carefully. Types of company that tend to make their money in the home market include housebuilders and retailers. Alternatively, if you want to invest passively in an index, one that tracks companies too small for the FTSE 250, such as the FTSE SmallCap, might be worth a look.

Imran Sattar, manager of the Edinburgh Investment Trust, which invests largely in British companies but includes many London-listed multinationals, said: ‘The recent strengthening of the pound has not been so great as to make me change the portfolio. However, if I felt it was becoming a problem there are plenty of excellent domestically focused stocks to choose from.’ The trust already includes some companies that make most of their money in Britain, such as Auto Trader, the online car marketplace, and Dunelm, the homewares retailer, which Mr Sattar described as ‘magnificent businesses listed in the UK’.

Will the pound get even stronger?

Let’s start with a caveat: the future direction of the foreign exchange market, like that of any financial market, is extremely hard to predict because of the plethora of influences at work, each of which itself behaves in unpredictable ways.

But some professional analysts think the pound will continue to gain strength.

Amundi, Europe’s largest investment manager, has said it expects the pound to rise further this year as Britain’s stable economy and government contrast with uncertainty abroad, such as the upheavals over the presidential election in America and political stalemate in France.

The company predicted that sterling would rise as high as $1.35 by the end of the year.

Amundi’s head of global foreign exchange, Andreas Koenig, told Bloomberg: ‘You have an improvement in [Britain’s] economic environment and you have a relatively stable government, so you have a lot of arguments in favour of sterling.’ ¹

JP Morgan, the giant American bank, has forecast that the pound could reach $1.35 by March next year.

Figures as of 24 July

Source:

¹ Bloomberg, 23 July 2024

Important information - Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.