The pound continues lower, but how can investors benefit from this and what does in mean for the UK?

At the start of 2022, the Pound vs Dollar pair was fetching 1.35, meaning if you were going to America from the UK £100 would convert to $135 – which was fine. Fast forward to September, and the pound reached an all-time low of 1.03. This now means you’d only get $103 for your £100. One of the main objectives of the UK government is to manage the balance of payments, which includes imports and exports into and out of the country. With the pound now being so low, this means that importing goods in the UK just became a whole lot more expensive. Though exporting becomes much cheaper. Let’s take a look at examples of how this system works.  

The Negative side?

Let’s say you own a Hotel, and that hotel buys bedsheets from America for $10 per sheet. At the start of the year, £100 would buy you 13 bedsheets with a little change left over. Fast forward today, your £100 would now buy you just 10 bedsheets. A as result, you as a hotel owner have lost 23% of your export purchasing powering to the USA. If you still need to purchase 13 bedsheets, that means your costs have now risen by 30%!

When you take this analogy and scale it up to large companies who do business outside of the UK, in countries like America, and even Europe, it causes major ripples in cash flow, operating profits and operations, which in turn could lead to redundancies.

This same theory applies to UK holiday makers who might be heading off to Europe or US on a holiday, your purchasing power as a tourist drops and therefore you must bring more money with you.

The positive side?

It’s not all doom and gloom however a lower pound actually has a benefit on exports (in most cases). Using another example, if you own a company which sells Shampoo at £1 per tub and you sell it all over the world to different people, hotels and companies. Another company in Europe also sells shampoo at €1.10. At the start of the year the American company wanted to buy 100 bottles of shampoo, so they got a price from you and from the European company. Your price was £100 (or $135) and your European counterpart was €110 (or $124). In this case, the American company would pick the European company as its saves $11. Fast forward to September this year, the same supplier wants another 100 bottles of shampoo, so he gets his prices, but on this occasion the exchange rates make a difference. 100 Bottles of shampoo from the UK will now cost the American company $103. And 100 bottles of shampoo from Europe will now cost the American company $106. The UK is now cheaper by $3, and the American company picks you, so you win the business! As a result, UK exporting grows. Scaling this up to companies in the FTSE100 like Reckitt Benckiser for example, you’ll see huge growth in exports as the UK becomes more attractive on a global scale.

If you take this analogy and apply the same theory to property prices it also gives similar results! If an American investor wanted to buy a £1m property in London in January they’d be paying $1.35m for it. Fast forward to September if that same property was still on the market, then the American investor would only be paying $1.03m. A $332,000 discount! Hence – the UK is on sale with a cheap pound.   

How can UK investors benefit from this?

For UK investors to benefit from a lower pound there are a few potential things they could do. Firstly, buy shares in export businesses, like Reckitt Benckiser or the FTSE100 in general (as many companies in the index export). The other option is for investors to attempt to trade the pound against the dollar or other currencies in the hopes they benefit from a recovery in its price. In order to safeguard money, moving it into safe-heaven currencies like the US dollar would also be a good potential way to offset any loss in value.