Interactive Investor

Weak pound sparks boom in overseas investments

9th August 2016 11:57

Colin Lawson from ii contributor

The post-referendum landscape has been characterised by volatility across global markets - but these developments have created a surprise Brexit boom.

The depreciating pound, while cutting the spending power of Brits holidaying on the continent, has benefited sterling investors in overseas funds, who have seen their returns rocket. This means bad news has been good news for markets - at least in the short term.

I'm an unashamed optimist, and while there is good reason for caution in the current investment climate, there is no doubt in the case of overseas markets that we have seen something of a short-term Brexit boost.

This has meant that sterling investors who have put their money into overseas funds have seen their returns amplified greatly by the depreciation of sterling post-Brexit.

Currency boost

For example, the main US market (the S&P 500) has grown 2.83% since before the referendum (23 June to 1 August), but a sterling investor tracking this index would have gained 15.32%.

This is because the value of the pound against the dollar has fallen around 11% - investors will have received a boost from the fact their fund has grown and also because the dollars they used to buy into the fund have increased in strength against the pound.

The big challenge for investors will be deciding the best time to exit these marketsMeanwhile, in Japan, where the Nikkei 225 index is up 2.45% since 23 June, a sterling investment has provided returns of 18.63% - so it's clear a falling pound has created some interesting opportunities for investors, especially in a climate where returns on cash ISAs and savings accounts are low.

With UK interest rates projected to remain at no higher than 0.5% until 2020, there is also a possibility that the currency effect we are currently seeing could be amplified further if US interest rates rise, making a further dent in the value of sterling.

The big challenge for investors will be deciding the best time to exit those markets.

Diversification is key when investing

With poor returns on savings accounts and cash ISAs characterising the past few years, savers have had to be more creative in their search for a healthy return on their savings.

Equities have been touted as a more attractive investment for savers seeking higher returns.

Investments in the FTSE 100 since 1996 have yielded an average 10-year return of almost 70% when dividends were reinvested, and we do not believe that the Brexit result need deter savers from weighing up stocks and shares as an option.

The first rule of investment is to buy low and sell high - and investment is most effective when pursued as a long-term strategy.

Investments are made largely on the basis that over the long term, money invested in the stockmarket provides stronger returns than when it is kept as cash. It's not a new idea.

For those looking to invest the key is diversification, which can ensure that any short-term potential portfolio damage is limited. As the old adage goes, it's never wise to have all your eggs in one basket.

Colin Lawson is founder and partner at wealth management specialist Equilibrium Asset Management.

This article was originally published by our sister magazine Money Observer here

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.