Currency weakness dramatically alters returns for UK investors abroad
Drilling into the raw numbers reveals a few interesting insights:
- The FTSE 100 rise was the first for three years and was mainly due to the dominance of the index by multinational companies whose overseas earnings became more valuable as Sterling declined after the Brexit vote on 23 June. The FTSE 250, which has a greater exposure to UK focused (medium sized) companies, rose by just 3.7%.
- Sterling had a bad year, which significantly boosted the returns for UK investors in foreign markets. The pound was down 19.4% against the Japanese Yen, 13.8% against the Euro and 16.7% against the dollar. Thus investments in European and Japanese markets were more profitable than an investment in the FTSE 100, despite what the (local currency-based) index numbers suggest. Once again, the wisdom of investment diversification has been illustrated.
- Emerging markets turned in widely different returns, a reminder that looking at just one global emerging markets index (or, indeed, choosing a fund which tracks one overall index) can be misleading. Brazil, which performed badly in 2015 as the markets and its currency weakened in the wake of political scandals, was a star performer in 2016, returning over 90% to sterling based investors.
2017 is likely to throw up some further surprises.
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.
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