Investments | 5 October 2022
Monthly update: Currency comes into focus
The pound’s recent plunge should be taken in the context of a strong dollar
WHAT'S HAPPENING?
Movements in international foreign exchange markets have been dominating the news, with the pound plunging in value against the US dollar last week. It later recovered, but its sharp fall shook markets.
The dramatic drop was due to the UK’s perceived lack of credibility among investors following the government’s new financial plans, as announced in its ‘mini-budget’. But that’s only part of the story.
The pound’s current weakness is in context, and contrast, to the US dollar’s strength. The dollar has been appreciating against other major currencies for most of this year, largely owing to the relative strength of America’s economy.
Lilian Chovin, Head of Asset Allocation at Coutts, says: “Another thing that’s helped the US dollar is that the US Federal Reserve is seen as more credible in terms of how it’s fighting inflation. It’s acted faster and more decisively than other central banks.
“We remain more constructive on the outlook for the US economy, which isn’t facing the same energy shock as Europe.”
“We remain more constructive on the outlook for the US economy, which isn’t facing the same energy shock as Europe.”
Lilian Chovin, Head of Asset Allocation, Coutts
WHAT DOES THIS MEAN FOR YOUR INVESTMENTS?
Our portfolios partly reflect currency moves, but it’s less direct than equity or bond prices, and depends on the investment.
Fixed income investments – bonds and credit – are generally not subject to currency volatility. Equity investments, on the other hand, are usually made in the local currency of the stocks involved. So this year’s strong dollar is relatively good news for investors whose reference currency is sterling or the euro – the returns are worth more when translated into their ‘home’ currency. It’s more challenging for those invested in dollars though.
More broadly, we had already made changes to diversify our clients’ investments away from the UK, before the government’s mini-budget hit the country’s investment markets.
We diversified our bond holdings away from just UK government ‘gilts’ to a basket of bonds from the G7 countries. We also reduced our exposure to UK equities, taking profit from more domestically-exposed stocks.
THIS MONTH'S SPOTLIGHT
Food for thought: SHIFTING SUPERMARKET DYNAMICS
The high inflation environment is changing shoppers’ behaviour and shifting dynamics within certain sectors. For example, in the food retail industry we’re seeing rising sales at discount supermarkets. And with competitive pressures likely to continue, we’re currently cautious on the sector.
Aldi recently overtook Morrisons as the fourth largest supermarket in the UK, according to data and insights company Kantar. They found that, in the last year, a typical annual household grocery bill rose by almost £600 to just under £5,200. As a result, consumers are seeking alternatives to their normal brands.
Richard Way, UK Equity Specialist at Coutts, says: “The discounters still have to pass through higher prices, they’re not immune to the wider inflation issues. But they tend to have a smaller range of products, largely own label, and their ‘no frills’ stores mean goods can be competitively priced.”
He adds that increased competitive pressures, as all market players try to protect their footfall and sales volumes, could further squeeze profit margins.
“Changes in the sector clearly show the pressures on household budgets,” he says. “And this is one reason why we’re cautious on ‘consumer discretionary’ from a stock picking perspective.”
Coutts investment clients can find out more about the latest market movements and what they mean by contacting their private banker, visiting our insights page or listening to our latest podcasts.
The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. Past performance should not be taken as a guide to future performance. You should continue to hold cash for your short-term needs.
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