How To Protect Against Sterling Falls
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Against which benchmark do you wish to protect the value of your Bristish Pounds, and for what reason? For example, are there specific foreign countries in which you plan to spend money? Or are you mainly looking to maintain purchasing power for imported goods and services?
As you have of course noticed, the value of GBP relative to many other currencies has recently dropped. The flip side of "protecting" the current [low?] value is that you may miss out on the gains of a strengthening pound- and while nothing is certain, things have a habit of reverting towards the mean.
Like others, I have some investments denominated in US dollars & Euros. These are worth about 20% more GBPs than they were 3 months ago. At the moment I'm tempted to make the opposite move to you, and sell them to "buy" cheap British Pounds.0 -
If you want to stay in cash - as opposed to equities/bonds - but diversify your fx exposure away from being 100% Sterling then I think there are some ETFs that just purely offer overseas currency exposure e.g. long USD v GBP etc though there will be a management fee for this. Personally I tend to use fx forwards via my spread betting account when I want to hedge or introduce fx exposure in various circumstances as this tends to work out cheaper in my experience.
You'll find a lot of global bond funds will hedge their overseas fx exposure back to Sterling as the managers do not consider themselves to be currency experts and want the returns to purely be driven by duration/interest rates/credit risk etc as opposed to currency movements. Big institutional investors will also tend to hedge their bond overseas fx exposure in many circumstance in order to reduce the mismatch with their liabilities. Global macro bond funds are more likely to take overseas fx exposure without hedging back to Sterling given the managers' view that currency calls are within their skill set.0 -
AnotherJoe wrote: »Surely any global bond would hedge against Sterling fluctuations by its very nature, e.g.global? If they hedged global bonds back to Sterling there would be no point having global mighta s we'll just invest in Sterling bonds.
The point of investing in global bond funds that hedge their overseas fx exposure back to Sterling is that it allows you to gain exposure to a much wider universe of bonds than just investing in Sterling issuers. Hence different economic cycles, interest rate environments, credit risks etc (albeit some overseas companies will issue Sterling bonds themselves).0 -
As the yokel said to the lost motorist:
"I wouldn't start from here if I were you."
All you can do is to make the best of it.
If you believe sterling will fall further, buy some US$ denominated assets.
I bought some HSBC at £4.25, and it's now at £6.19, thanks to the US$ dividend; AND the share buy back program. Alas, the bulk of my money is still in sterling, but the rise has certainly lessened the pain.
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I don't see how you can sensibly exclude currency movement by hedging in a tracker fund. If you look at the UK FTSE market from a say US perspective it really hasn't moved much as whilst they would get more £'s for their dollar they are buying shares that have risen in price to compensate. To me the currency movement is an essential part of tracking. If you had hedged the currency then you would just be distorting what has happened.
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I just bought a lot of British Pounds. Paid for them by selling units of the world equity index tracker "VWRL"
Reasoning:
- world stock markets are at long-time highs
- GBP is at long-time low
Sell high, buy low? Guess only time will tell0 -
If your expenses are all in sterling, I don't think you need to be hedged against exchange rate fluctuations. This should only be a concern if you have expenses denominated in a foreign currency or want to buy property overseas.
Stock market investments in pounds are by their nature hedged against falls in sterling, because a fall in the value of the pound makes it look cheaper to investors (notice how the FTSE goes up as the pound falls). Similarly a US$10 stock market investment would be worth more pounds if the pound falls.0 -
steampowered wrote: »If your expenses are all in sterling, I don't think you need to be hedged against exchange rate fluctuations. This should only be a concern if you have expenses denominated in a foreign currency or want to buy property overseas.
Most people have expenses which are impacted by exchange rates.
For example, I could download a Hollywood movie (home market cost-base:USD) to watch on my Samsung tablet (Korean Won) or via the app on my Sony PlayStation (Japan Yen) on my budget telly (Chinese RMB). I could pour some Australian wine (AUD) while waiting for it to stream, and then curse as I spilled it and needed to use my Dutch washing machine and the tumble dryer from Taiwan.
I could go and replace the wine with some vintage French stuff but unfortunately my pounds are competing with the wall of money from nouveau-riche Chinese middle classes who have more money to spend if the RMB is worth relatively more than the pound and so my wine bill went up.
Not to worry I can go get some less well known but cheap and tasty English wine if I drive over to Chapel Down, I'll do that in my German VW after filling up with petrol from the Total petrol station which this week took their supply from Esso's stash at the refinery because Total had some sort of convoluted forward pricing deal agreed with Exxon to fix their Euro price for a Dollar product.
To go with my wine I'll stop off at the supermarket for some groceries and be annoyed that the price of the veg I wanted which was in season in another part of Europe has gone up since Brexit. An extra 10% on onions from June to August dammit!
Ah well, I'll just start a vegetable patch and pay my gardener for an hour a week extra, he charges me in pounds.
Oh, the gardener has put his rate up by 10%, as he's got to make a living and now finds groceries, electronics, white goods and his new van rather more expensive than they were when sterling was stronger. And apparently while he's out working for me, his Norwegian au pair is costing an arm an a leg, having asked for a bigger allowance because she needs to send money back to her elderly mother overseas and the pound doesn't buy so many NOK this year.
Incidentally, the mother is using some expensive health treatment patented by a US pharmaceutical company which has a global price denominated in dollars, so dear daughter really did have to charge more pounds to stay afloat. It was a choice of cover the medical bills or pay for the euthenasia ranch in Geneva, but her pounds didn't buy enough francs for that.
So, while every single one of those transactions was conducted in sterling here on a UK high street (you don't need to get me started on my overseas holiday plans), I accept my place as having "non sterling expenses". It would be very useful indeed of my overseas assets could grow with those economies *and* not have any exchange effects eliminated thank you very much. I need to be able to cash in lots of US, euro, chf, yen, won, aud, ringgit in retirement to fund my lifestyle.
Oh and the utility companies with their overseas call centres outsourced to India and Philippines mean I should probably have some rupee and peso too, because an element of my overall bill is definitely impacted by their costs. You know what they say, in for a penny...Stock market investments in pounds are by their nature hedged against falls in sterling, because a fall in the value of the pound makes it look cheaper to investors (notice how the FTSE goes up as the pound falls).
Yes, we noticed the rise, but your explanation isn't the reason for it.
The reason FTSE goes up as the pound falls is because the major constituents of the FTSE have assets or earnings denominated in foreign currencies and those earnings are inherently worth more sterlings if each sterling is not worth as much of the foreign currency. So the value of the company in sterling pence on the stock market, is likely to rise. Thus the component of the overall index supported by overseas revenues, will rise (when measured in sterling).
So, that's the UK companies with foreign incomes.
Then there are of course UK companies with exclusively sterling incomes, but they do not look "cheaper to foreign investors" when sterling falls. For example, imagine a company serving the UK market with everything priced in GBP and all its costs in GBP. It makes £10m a year so the market will happily value it at £100m. To a USD investor he could buy in and get $14m of earnings a year for $140m of market cap, if he wanted. 10x earnings.
When the exchange rate changes, the £100m of company value might only now cost $120m to US investor instead of $140m. Cheap, right?! No. Because what he gets for his money when he pays out his $120m is not annual profits and dividends of $14m a year, but only $12m a year. So he will not pay any more money for it than he would have been willing to pay yesterday, even though you say it "looks cheaper".
In fact, as the company quite possibly has some costs denominated in foreign currencies, which are now higher because of sterling weakness, its annual profits may fall from £10m to £9m. So, a US (or UK) investor valuing the company at 10x earnings sees the company as being worth rather less than £100m/$120m and would prefer to pay £90m/$108m instead.0 -
bowlhead99 wrote: »Most people have expenses which are impacted by exchange rates.
For example, I could download a Hollywood movie (home market cost base-USD) to watch on my Samsung tablet (Korean Won) or via the app on my Sony PlayStation (Japan Yen) on my budget telly (Chinese RMB). I could pour some Australian wine (AUD) while waiting for it to stream, and then curse as I spilled it and needed to use my Dutch washing machine and the tumble dryer from Taiwan.
I could go and replace the wine with some vintage French stuff but unfortunately my pounds are competing with the wall of money from nouveau-riche Chinese middle classes who have more money to spend if the RMB is worth relatively more than the pound and so my wine bill went up.
Not to worry I can go get some less well known but cheap and tasty English wine if I drive over to Chapel Down, I'll do that in my German VW after filling up with petrol from the Total petrol station which this week took their supply from Esso's stash at the refinery because Total had some sort of convoluted forward pricing deal agreed with Exxon to fix their Euro price for a Dollar product.
To go with my wine I'll stop off at the supermarket for some groceries and be annoyed that the price of the veg I wanted which was in season in another part of Europe has gone up since Brexit. An extra 10% on onions from June to August dammit!
Ah well, I'll just start a vegetable patch and pay my gardener for an hour a week extra, he charges me in pounds.
Oh, the gardener has put his rate up by 10%, as he's got to make a living and now finds groceries, electronics, white goods and his new van rather more expensive than they were when sterling was stronger. And apparently while he's out working for me, his Norwegian au pair is costing an arm an a leg, having asked for a bigger allowance because she needs to send money back to her elderly mother overseas and the pound doesn't buy so many NOK this year.
Incidentally, the mother is using some expensive health treatment patented by a US pharmaceutical company which has a global price denominated in dollars, so dear daughter really did have to charge more pounds to stay afloat. It was a choice of cover the medical bills or pay for the euthenasia ranch in Geneva, but her pounds didn't buy enough francs for that.
So, while every single one of those transactions was conducted in sterling here on a UK high street (you don't need to get me started on my overseas holiday plans), I accept my place as having "non sterling expenses". It would be very useful indeed of my overseas assets could grow with those economies *and* not have any exchange effects eliminated thank you very much. I need to be able to cash in lots of US, euro, chf, yen, won, aud, ringgit in retirement to fund my lifestyle.
Oh and the utility companies with their overseas call centres outsourced to India and Philippines mean I should probably have some rupee and peso too, because an element of my overall bill is definitely impacted by their costs. You know what they say, in for a penny...
Yes, we noticed the rise, but your explanation isn't the reason for it.
The reason FTSE goes up as the pound falls is because the major constituents of the FTSE have assets or earnings denominated in foreign currencies and those earnings are inherently worth more sterlings if each sterling is not worth as much of the foreign currency. So the value of the company in sterling pence on the stock market, is likely to rise. Thus the component of the overall index supported by overseas revenues, will rise (when measured in sterling).
So, that's the UK companies with foreign incomes.
Then there are of course UK companies with exclusively sterling incomes, but they do not look "cheaper to foreign investors" when sterling falls. For example, imagine a company serving the UK market with everything priced in GBP and all its costs in GBP. It makes £10m a year so the market will happily value it at £100m. To a USD investor he could buy in and get $14m of earnings a year for $140m of market cap, if he wanted. 10x earnings.
When the exchange rate changes, the £100m of company value might only now cost $120m to US investor instead of $140m. Cheap, right?! No. Because what he gets for his money when he pays out his $120m is not annual profits and dividends of $14m a year, but only $12m a year. So he will not pay any more money for it than he would have been willing to pay yesterday, even though you say it "looks cheaper".
In fact, as the company quite possibly has some costs denominated in foreign currencies, which are now higher because of sterling weakness, its annual profits may fall from £10m to £9m. So, a US (or UK) investor valuing the company at 10x earnings sees the company as being worth rather less than £100m/$120m and would prefer to pay £90m/$108m instead.
Oh Sensei! Is this the start of inflation??
Save 12K in 2020 # 38 £0/£20,0000 -
Just because everything starts to cost a lot more money doesn't mean we'll have inflation. Oh wait.Oh Sensei! Is this the start of inflation??
Well, maybe we won't have inflation because those potentially-increased prices will fall as a result of reduced demand when consumers take their money out of the economy to stash as savings in bank accounts at this high new base rate. Oh wait.
Well, don't worry about food and consumer goods going up in price because it will be cancelled out by much reduced oil prices so you won't spend more in total. Last October it was down to $46-47 and fell substantially to below $40 a few months later so hopefully it'll keep falling at that pace. Oh what's that, it's $53 today as Russia said it supports OPEC's production freeze to support and raise the price? So cheaper oil is a pipedream then.
Well, phew, at least the oil price is in dollars and dollars are much cheaper to buy than they were a few months back. Oh wait.0
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