International stocks prove happy hunting ground for UK investors

Sterling investors were best off last year when compared to investors in other currencies, such as the US dollar and the euro, writes Tom Bailey.

The elevated risk of a no-deal Brexit saw sterling continue to weaken in 2018, furthering the slide it has experienced since June 2016, when the UK voted to leave the European Union.

A decline in the value of sterling is generally bad news for consumers and businesses that depend on imports, with a weaker pound raising the cost of goods from abroad. 

However, as investors in the FTSE 100 over the past year will know, there are both winners and losers of currency swings. Most companies on the blue-chips stock index, for instance, derive their earnings from abroad meaning that the weak pound resulted in a profit bump when earnings were repatriated. 

In 2018, the weakness of the pound also worked in favour of UK investors. According to data firm Morningstar, when looking at average returns from both its fund categories and indices, sterling investors were best off when compared to investors in other currencies, such as the US dollar and the euro. 

Of the data company's 106 equity indices (table 1), a total of 14 returned positive results for sterling investors in 2018, compared to 11 for investors in euros and two for investors in dollars.

The strongest-performing index sector was healthcare, which provided investors a return of 8.9%, followed by utilities, which returned investors 8.3%. Brazilian and Russian equities also saw sterling-denominated investors relatively well rewarded, providing respective returns of 5.7% and 5.5%. 

Such returns stood way above those provided by most major market indices, the vast majority of which ended the year in negative territory.

When it came to investment fund categories for active funds (table 2), sterling denominated investors were also slightly better off than their American counterparts. None of the 106 equity fund categories gave dollar-denominated investors a positive return in 2018. In comparison, investors using euros or sterling saw six fund categories finish the year in positive territory, albeit with relatively low returns.

The best-performing fund category was Africa & Middle East equities, which returned investors 4.8%, when measured in pounds. Next up was utilities, providing a return of 4.4%, followed by Brazilian equities with a return of 3.1%. 

Table 1

Source: Morningstar         Past performance is not a guide to future performance

Table 2

Source: Morningstar    Past performance is not a guide to future performance

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.