Will A Strong Pound Hurt The FTSE 100?

The FTSE 100 (INDEXFTSE:UKX) is unlikely to come under pressure if the British pound continues to rally, argues this Fool.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

You have to deal with currency swings in all market conditions, so I wouldn’t lose sleep over it — not even now that the British pound trades at multi-year highs against the euro and has rallied against the US dollar and other currencies. 

True, a strong pound could harm the domestic economy because it could reduce exports, but it could also signal the possibility of rising interest rates, higher investment and stronger consumption rates in the UK. The latter is my preferred scenario. 

In a low-rate environment that is likely to persist, strength in the domestic currency is more likely to boost the FTSE 100 than to sink it, in my view, while strengthening the UK’s position as a safe haven in the West. It could well be a win-win for currency and equity investors. 

Trends

It’s never been easy to determine whether the psychological benefits of a strong domestic currency outweigh the obvious downside — a loss of competitiveness, lower tax receipts and so forth — that such a situation may bring. 

Inter-market analysis, according to which different asset classes tend to manifest similar patterns and key relationships over time, provides a helping hand in the determination of possible trends for equities, bonds and commodities — but currency movements are seldom easy to predict.

One year ago, reports suggested that the UK’s blue-chip index was sitting “on a ticking timebomb of revisions to forecast earnings after sterling hit a six-year high.” 

Earnings have indeed gone down at a few UK companies with worldwide currency exposure, but the FTSE 100 is flat over the period, while other elements have contributed to its poor performance, I’d argue. 

Encouraging Signs 

So, the UK is doing better than others — and that’s reflected in a strong sterling. 

As the Guardian noted last month, a jump in exports had “helped Britain’s trade gap narrow to its smallest for a year in April, raising hopes that overall economic growth has rebounded from its slump at the start of 2015.

At less then £9bn, the trade deficit’s figures caught bearish economists by surprise — the country recorded the lowest deficit since early 2014.

Mark Carney, the Governor of the Bank of England, hinted at a slow rise in rates between 2015 and 2016, but hawkish monetary policies are not an option for the European Central Bank, while the US has been slower to act than I expected it to be — and one key problem for the US is that it can hardly afford a much stronger domestic currency.

Consider recent trends. 

Against the euro, the British pound has risen:

  • 11.3% since the turn of the year (FTSE +3.8%); 
  • 13.4% over the last 12 months (FTSE +0.7%);
  • 23% over the last two years (FTSE +2.5%).

The FTSE could benefit from troubles elsewhere, even more so now than in the past. 

If European countries do not manage to find some kind of stability, I wouldn’t be surprised if the £/€ surpassed its previous pre-crisis highs, heading from its current 1.4/2  towards 1.8/2 by 2020. 

Against the US dollar, the British Pound has risen:

  • 6.6% since its one-year trough in mid-April;
  • o.2% since the turn of the year;
  • 2.5% since July 2013. 

Meaningful fluctuations in global currency markets may determine short-term volatility for the stocks of companies with worldwide exposure but, in my experience, long-term value is the inevitable outcome when companies present a balanced mix of strong fundamentals and accurate projections as well as friendly capital allocation strategies and attractive trading metrics. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Jumbo jet preparing to take off on a runway at sunset
Investing Articles

Down 70%+ since 2020, is IAG’s share price an unmissable bargain?

IAG’s share price is still down around 73% from its pre-Covid level, but with the business performing well last year,…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

£17,000 of shares in the FTSE 100 dividend giant can make me £18,874 every year in passive income!

This FTSE 100 dividend superstar has an 8.8% yield with dividends projected to rise. It looks very undervalued to me…

Read more »

Investing Articles

2 top UK growth stocks I’m buying for my Stocks and Shares ISA in July

Looking for UK-listed growth firms to add to a Stocks and Shares ISA? Our writer highlights two he's planning to…

Read more »

artificial intelligence investing algorithms
Investing Articles

This overvalued growth stock makes Nvidia look cheap!

ARM Holdings is a growth stock that’s benefitted from the AI rally. Muhammad Cheema takes a look at whether this…

Read more »

Investing Articles

1 penny stock I’d buy today while it’s 63p

This penny stock's down 70% since last March, yet could be set for a big comeback as the firm rebuilds…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

Buying 8,617 Legal & General shares would give me a stunning income of £1,840 a year

Legal & General shares offer one of the highest dividend yields on the entire FTSE 100. Harvey Jones wants to…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

£25k to invest? Here’s how I’d try to turn that into a second income of £12,578 a year!

If Harvey Jones had a lump sum to invest today he'd go flat out buying top FTSE 100 second income…

Read more »

Union Jack flag in a castle shaped sandcastle on a beautiful beach in brilliant sunshine
Investing Articles

2 lesser-known dividend stocks to consider this summer

Summer is here and global markets could be heading for a period of subdued trading. But our writer thinks there…

Read more »