While sterling has dropped 6% since the start of 2013, UK equities have risen almost 8%. Both Japan and Switzerland have witnessed the same sort of activity as their own currency depreciates; Swiss equities have risen almost 9%, while Japanese equities have made a 13.5% gain despite the yen weakening by 9% since the start of the year.
Many of the year’s best performing equity markets have been associated with some of the weakest currencies, and the impact of currency depreciation on total returns can be significant when the investor isn’t investing in local currency.
Norman Villamin, CIO, Coutts Europe, said : “A sterling-referenced investor will have seen the performance of a US portfolio (S&P 500) of 6.0% more than double to 13.1%, while a Hong Kong dollar-referenced investor will have seen the performance of a UK portfolio (FTSE 100) of 7.0% slump to just 0.3%.”
Villamin forecasts the pound falling to $1.48 by the end of the year as UK policymakers indicate support for further weakness, while he anticipates weak currencies replacing government bond yields as the policy tool of choice to shore up weak growth.
“Global investors need to actively manage currency exposure to ensure that attractive local currency equity returns are not forfeited through foreign exchange losses. It’s only a matter of time before Eurozone policymakers also turn to this tool, though probably belatedly, as has been the case in the past, to revive the moribund eurozone economy.”
