Monday, 2 December 2013

Pounded by the Pound

My share picks have been doing reasonably well but my portfolio has failed to enjoy the full benefit. This has been because of the exceptional strength of the Pound and the weakness of the Dollar.

Since August the Pound has moved up over 8.5% from 1.51 Dollars to the Pound to 1.64. This has mostly been a Pound phenomenon since the Euro has risen a mere 3%.

Dollar weakness is often the result of a benign stock market. Confident investors  are willing to take risk. The Dollar is seen as safe haven but in a good investment climate opportunities for better returns tempt investors away from Dollar bonds and into stocks.

Good economic news has been coming out of the UK for some time and the coalition government's policy for reducing the deficit is bolstering the strength of the Pound.

The Euro zone is still plagued by fears about its stability of its currency so the Euro has not kept up with the Pound. Interestingly, a couple of days ago, Moody's upgraded its rating of Greek debt by two notches and S&P has made positive noises about the Spanish economy. On the other hand Dutch credit rating has been  reduced by S&P. So we still have a mixed picture for the Euro.

My portfolio has had to take the Pound's strength squarely on the chin. All that money I have invested in Dollar denominated shares has suffered from the weakness of the currency. That includes the Chinese shares for the Chinese currency moves with the dollar. My hard work in picking good shares has been undermined when I convert my performance back into Pounds. It is a risk that I have always known I was taking. The fact that I continue to do fairly well despite losing on currency suggests that my decision to avoid the UK stock market is the correct one. That does not mean that I would not like to see some pound weakness to help my returns.

British exporters must be hurting too so perhaps we will see some efforts by the government to curb the strength of the Pound. But that possibility is balanced by the inflationary effect of a weaker Pound and the risk that interest rates may be raised if the economy gets too strong.

No comments: