Burgernomics: Why the price of a Big Mac may hold the key to better investment returns

When was the last time you bit into a Big Mac – and how much did you pay for it? If it was recently, and in Britain, it will have cost £2.29 – much more, when converted back into dollars, than you'd have paid in the US. Over there, the same burger would have cost you just $3.57, which back in July was equivalent to about £1.80, and even after the sharp falls in the value of the pound over the past month, still only equates to £2. According to the Big Mac Index, run by The Economist, this differential is a signal that our currency is too expensive relative to the dollar, and needs to fall back to $1.56 (from around $1.77 today, and more than $2 in July), before it be fair value.

In reality, the amount we can learn about exchange rates from so-called "burgernomics" is limited, but over the years it has provided some indication as to where the world's major currencies may be going. And, while most people may pay little attention to exchange rates except when they're off on holiday, the shifts in currency markets are crucial when it comes to investing.

Robin Geffen, the managing director of Neptune Investment Management, says the weakening of the pound over the past month will bring mixed fortunes for British investors. "British companies that rely on a lot of imports from overseas – which means their costs are in foreign currencies, but their revenues are in sterling – are going to suffer," he says. "Equally, some UK companies – like the drinks company Diageo and the drug companies Glaxo and AstraZeneca – generate a lot of their earnings in dollars, and so the strengthening of the dollar is something of a windfall for them."

He adds that a handful of large British businesses, such as BP, pay their dividends in dollars, so the weakening of the pound will be a boost for shareholders.

The deterioration of the dollar against the pound over the past five years has largely been bad news for investors, especially those invested in UK-based funds that invest in the US. But the reversal over the past month has provided a sudden boost for investors. Martin Currie's North American fund, for example, is up more than 11 per cent in five weeks.

So if currency can have such an effect on the value of your investments, is it worth protecting against such moves, and, if so, what options are available?

Some funds will hedge the currency risk for you. Some of Neptune's funds, for example, do just that. So before you buy into a fund, it's worth finding out whether the manager has any in-built protection.

If not, it may be worth considering covering yourself if you've got a large holding in one particular foreign market, or if you're only investing for a short period.

The simplest way to hedge against currency risk is to buy some of that currency. The major banks all offer foreign currency accounts. However, if you've got a large investment, this may be an expensive way of covering your position.

A cheaper way is to use covered warrants or spread betting, which allow you to put down a small amount of money to cover a large position, through the use of gearing. Covered warrants, offered by the likes of SocGen, tend to only be available for the main currencies – euro, dollar and yen. However, it's possible to take out a spread bet on any currency. SocGen has online tutorials explaining how warrants work (uk.warrants.com), while firms such as City Index will teach you about spread betting (www.cityindex.co.uk).

Over the coming months,however, protection may not be a priority, as analysts are predicting a further deterioration in the pound, which will benefit UK investors. Alan Steel, from financial advisers Alan Steel Asset Management, points out that the dollar has tended to fluctuate between $1.45 and $2 over the past 20 years, and may now be reverting back to the bottom of that range. He believes that this, along with the fact that US equities are relatively cheap, makes now a great time for investors to buy into US mutual funds. "It's a vast country, has a positive birth rate, has low taxation, its companies are on low price/earnings ratios – yet only a small number of UK investors have any exposure to it," he says.

Steel recommends Martin Currie's and Resolution's North American or Neptune US Opportunities for higher risk investors. Unless you're an experienced investor, it's worth seeking financial advice before making any investment decisions.

To find an adviser, visit www.unbiased.co.uk.