Good for Holidays, Less so for Investments

The strength of the pound is showing up in welcome and unwelcome ways

If you were heading off to Europe a year ago on holiday, you would have been offered, as a tourist, an exchange rate of around €1.115 for each pound. This year the rate as at the end of July was about €1.235, an increase of nearly 11%. Eurozone annual inflation is running at just 0.5%, so you are gaining more than 10% in purchasing power. It is a similar story if your destination is the USA, where last year’s $1.48 to the pound is now around $1.655.

The robust performance of the pound is quite a recent event and needs to be set against the sharp fall which the Bank of England allowed to happen during the financial crisis, as the graph below brutally demonstrates.

Chart showing the relative values of US Dollar and UK Pound 2003-2014

The recovery of sterling may now be making holidays less costly, but it is having a less pleasant impact on investors:

While the multinationals are suffering, smaller UK companies with a focus on consumer services are doing well, thanks to the recovering economy and much less foreign competition. Managers of UK equity income funds are therefore having to look beyond the big FTSE 100 names if they want to increase the dividend payments to their investors.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.