It’s been a busy few months for financial markets.
The UK Autumn Budget, the US Election, higher than expected inflation, lower than expected inflation, better growth, worse growth, jobs reports have all led to market volatility.
Since the turn of the year, the narrative has been largely dominated by bonds which have sold off. What’s perhaps slipped slightly under the radar is that in this turbulence the pound has quietly been depreciating – it’s now worth substantially less than it was a few months ago.
Back in September, £1 would buy you 1.3426 US dollars. On 20 January, it would have bought you just 1.2321 dollars.
Now this isn’t exactly great news for holidaymakers wanting to buy dollars to spend abroad. However, in investment terms it might not be a bad thing at all as some groups stand to benefit substantially from a falling pound.
Groups that stand to lose out, other than holidaymakers, include importers. These are British companies that buy components or services abroad.
That’s because they now need to spend more pounds to get the same goods, pushing up their costs.
Exporters (British companies that sell goods or services abroad), on the other hand, could stand to benefit. It means their goods suddenly become cheaper and the other party might be able to afford to buy more.
When it comes to UK stocks though, the real winners are likely to be those companies who generate a lot of revenues abroad.
These tend to be the larger companies that make up the FTSE 100 index. It’s estimated that around 80% of the revenues of FTSE 100 companies come from abroad.
This could well be one of the factors that‘s helped the FTSE 100 to rise over 4%* (in total return terms) since the start of the year. This is a very short time frame and investors should be prepared to hold for the long term.
For investors in the UK, any investments overseas are also likely to be helped by a weaker currency. If you own a US fund, the same dollar return will now convert back into a larger amount of sterling.
So, when the pound is weaker, it can generally benefit investments outside the UK – another reason why having a diversified portfolio is so important.
If you think the pound could continue to fall, here are three fund ideas that could help you take advantage of that.
Legal & General UK 100 Index Trust
For pure exposure to the largest companies in the UK, you could consider buying a tracker fund like the L&G UK 100 Tracker.
This lets you buy the same companies as the index and in the same proportions.
It will give you access to those large UK companies that generate so much of their revenues overseas and can therefore benefit from a weakening pound.
Investors should note that, as of 31 October, this fund invests 21.52% in companies involved with the extraction of oil, gas or coal (in line with the index).
This could leave the fund vulnerable to fluctuations in commodity prices, regulatory changes aimed at reducing carbon emissions, and potential shifts in consumer preferences towards sustainable alternatives.
31/12/2019 To 31/12/2020 | 31/12/2020 To 31/12/2021 | 31/12/2021 To 31/12/2022 | 31/12/2022 To 31/12/2023 | 31/12/2023 To 31/12/2024 | |
|---|---|---|---|---|---|
Legal & General UK 100 Index C Acc | -11.41 | 17.36 | 5.18 | 7.53 | 9.49 |
FTSE 100 TR | -11.55 | 18.44 | 4.7 | 7.93 | 9.66 |
Rathbone Global Opportunities
The Rathbone Global Opportunities fund could be a good option to add some global diversification to your portfolio.
It lets you invest in companies based all over the world and ones that generate their revenues in a range of different currencies.
James Thompson, the fund’s manager, is one of only a few global fund managers to show they can pick great companies and perform better than the broad global stock market over the long term.
He looks for easy-to-understand businesses that can grow to dominate their industry and defend themselves from competition.
He'll also search off the beaten track to find companies with superb potential that might be overlooked by other investors.
Thomson thinks exceptional companies are few and far between, so he only invests in a small selection. This gives each the potential to contribute significantly to performance. It could increase risk though, as could the flexibility to invest in smaller companies and emerging markets.
At the moment, he mainly invests in developed markets, like the US, UK and Europe.
31/12/2019 To 31/12/2020 | 31/12/2020 To 31/12/2021 | 31/12/2021 To 31/12/2022 | 31/12/2022 To 31/12/2023 | 31/12/2023 To 31/12/2024 | |
|---|---|---|---|---|---|
Rathbone Global Opportunities S Acc | 31.61 | 20.46 | -20.37 | 18.3 | 17.46 |
IA Global TR | 14.84 | 17.95 | -11.05 | 12.45 | 12.49 |
Artemis US Smaller Companies
If you think the US dollar is likely to keep strengthening, you might want to get some exposure to US domestic companies that generate most of their revenues in the US.
The Artemis US Smaller Companies fund has been managed by Cormac Weldon since its launch in 2014. Olivia Micklem joined Weldon on the fund as a co-manager in 2022, though they have worked together for many years.
They seek out smaller companies with potential for their share price to grow.
We like the way the managers consider how the US economy is performing to actively find sectors and companies that are benefiting from trends, as well as areas that are finding things tough.
The fund aims to deliver long-term growth by investing in smaller companies based in the US.
Smaller businesses are often among the most innovative and offer lots of growth potential, as well as generating larger proportions of their revenues domestically. But they're also higher risk than their larger counterparts.
The fund usually consists of 40-60 companies. Holding a smaller number of investments can increase risk, as each has a larger impact on performance.
Investors should note that, of the funds under research coverage, this is one of the most carbon intense.
That means the companies within the fund could face increased scrutiny from investors and regulators. They could also face higher costs that come with managing carbon emissions management, potentially impacting the fund’s performance.
31/12/2019 To 31/12/2020 | 31/12/2020 To 31/12/2021 | 31/12/2021 To 31/12/2022 | 31/12/2022 To 31/12/2023 | 31/12/2023 To 31/12/2024 | |
|---|---|---|---|---|---|
Artemis US Smaller Companies I Acc GBP | 24.58 | 17.75 | -19.38 | 12.74 | 25.02 |
IA North American Smaller Companies TR | 22.53 | 16.21 | -13.53 | 10.68 | 12.75 |