There is a race to the bottom when it comes to global currencies. Economies facing stagnation are looking to weaken their currencies to boost exports. But when every man and his dog are at it too, then the game plan can fall apart.
In the UK's case, not only has its efforts to weaken the pound been scuppered by competitive devaluation from other countries, but sterling has also been perceived by speculators to be a safe-haven currency. However, sterling may be about to be knocked off its safe-haven perch. There are concerns that sluggish economic growth could see the UK lose its triple-A status. The UK may also find it harder to cut its debt levels as quickly as it would like. That could open the floodgates for a sterling exodus, which could bring down the pound.
That may not be such a bad thing. The UK desperately needs a dollop of devaluation to make its products and services more competitive. But where does this leave investors?
It is almost impossible to predict the moment when sterling will fall against other currencies. However, that doesn't mean you can't protect your investments in other ways. For example, half of the UK's biggest 100 companies generate negligible profits from the UK itself. Some 80 per cent of FTSE company profits are generated outside the UK. So investing in these companies' shares – such as British American Tobacco, BHP Billiton, Standard Chartered and SABMiller, could be one way of exposing your portfolio to overseas markets without taking on too much risk.
Another way is to simply invest through a low-cost FTSE 100 index tracker. This will automatically provide both exposure to foreign currencies and diversification at the same time.
For more adventurous investors, many online brokers these days will let you buy shares listed on foreign markets. The trading costs can be a little higher than buying UK quoted companies but it can open up a whole new universe of shares that could transform the complexion of your portfolio.
David Kuo is director of investment advice website Fool.co.uk
- More about:
- Bhp Billiton
- British American Tobacco
- British Pound
- Foreign Exchange
- Standard Chartered