The pound’s resurgence is catching the eye of investors and financial advisers alike. But what’s fuelling this revival, and more importantly, what does it mean for your clients?
After a wild ride in 2022, when the pound plummeted to $1.07 during the infamous ‘Truss-gate’, sterling has quietly staged a comeback. Now trading comfortably above $1.30, sterling’s recovery hasn’t been flashy, but it’s been effective. The newfound stability in the UK government has restored confidence in the pound, turning it into a relative safe haven amid the political and economic uncertainties plaguing much of Europe and even the US. This return to stability is helping sterling claw back its losses and more.
However, a stronger pound can send ripples across various asset classes, and as an adviser, it’s crucial to know where the resulting waves might break.
Multi-asset funds: if your clients hold unhedged global bonds, they’ve likely felt the pinch. As the pound strengthens, the value of these overseas bonds dips when converted back to sterling. The same goes for global equities, which face a headwind as the pound’s rise diminishes the sterling value of foreign earnings.
Inflation and interest rates: over time, a stronger pound could help tame inflation by lowering the cost of imports. This might lead the Bank of England to ease off on interest rate hikes, which could be good news for bond prices — though the bond markets haven’t fully priced this in yet. ̶̶
Don’t jump to conclusions
A stronger pound doesn’t automatically spell good news for UK equities. In fact, over the past few years, US equities have left their UK counterparts in the dust, thanks to the tech sector’s meteoric rise and the recent AI boom. These factors have had a much bigger impact on equity markets than currency movements.
That said, when you stack UK equities against other non-US markets with less tech exposure, the story improves. UK equities have outperformed European and Japanese markets over the past three years. But this might have more to do with factors like the Ukraine conflict and fluctuating energy prices in Germany than with sterling’s strength.
Similarly, UK mid-cap stocks are often hailed as the big winners when sterling is strong. And over the past year, the mid-cap index has kept pace with larger markets. But dig a little deeper, and you’ll see that this index is heavily weighted in global investment trusts and real estate companies — sectors that don’t necessarily benefit from a stronger pound. So, while mid-caps might look like a safe option, remember: just because something looks good on paper doesn’t mean it will pan out in reality.
Where will the pound go next?
Sterling’s recent bounce-back is impressive, but how much higher can it really go? The US dollar has been on a winning streak for decades, powered by America’s flexible labour markets, abundant natural resources, and its role as the global reserve currency.
And as we know, forecasting exchange rates is like trying to predict the weather in Britain: tricky at best. Therefore, we’re now adopting a more cautious stance, compared with our bullish view of a couple of years ago. As the old saying goes, "You can’t call yourself a macro trader unless you’ve lost a fortune shorting the yen." With currency markets as unpredictable as ever, we’re scaling back our sterling-hedged positions, recognising that even the best-laid plans can go awry.
Navigating the complexities
In summary, sterling’s resurgence presents a mixed bag of opportunities and challenges for financial advisers. While a stronger pound could influence everything from inflation to global equities, it’s just one piece of a much larger puzzle. Geopolitical risks, sector-specific trends, and broader economic factors all play a role in shaping the investment landscape.
As you guide your clients through these shifting tides, remember to keep a balanced perspective. As they say, “Fortune favours the prepared mind.” By staying nimble and informed, you can help your clients navigate the complexities of sterling’s comeback and position their portfolios for success.
Important information
The value of investments may fall as well as rise and investors may not get back the amount invested.
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