The British pound (GBP) has been a strong currency, but the currency is weakening with the never-before economic environment. As a business in the import industry, the weak currency can mean the difference between making a profit and making a loss as import becomes more expensive. As an individual, household income value depreciates as the purchasing power of the currency decrease due to the increase in goods and services. In the face of the weakening currency, it is crucial to take adequate steps to protect your wealth against it.
Why is the Pound Weakening?
The pound sterling has been a stable currency over the years; however, its value has depreciated in comparison to other currencies substantially in the past couple of years. The pound has weakened a lot compared to the other currencies, including the US Dollar.
Brexit: The downward journey of pound sterling began with the UK’s vote to leave the European Union or the Brexit referendum in June 2016. Following the referendum, the British pound dropped to a 31-year low against the US dollar and fell 11% in two trading days. Some of the value recovered in the following days and months; however, the pound remains weak. The weakening in the pound represented the economic uncertainty surrounding Brexit and reduced investors’ confidence.
The British pound suffered further weakness when Brexit was finalized. It was a result of widespread anxiety among people about the outcome of Brexit, its impact on trade relations between the UK and the EU, and lateral impact on prices of goods and services, travel restrictions, and other expected changes post-Brexit. With a weak British pounds, companies might have to increase wages to make working in the UK attractive to foreign workers.
COVID: The UK markets and pound were still recovering from the negative effects of Brexit when the coronavirus pandemic hit the world at the beginning of 2020. The COVID-19 pandemic devastated the global economy, leading to business failures, high unemployment rates, and lower investors’ confidence. The global lockdowns impacted several businesses, and the pound suffered a further decline. The value of the British pound had a small breath of air when a new COVID strain was discovered in the UK, bringing the value of GBP down again.
Stimulus Packages: The UK government and Bank of England are trying every means in the book to revive the UK economy. Bank of England announced stimulus packages to boost the struggling economy and helped the pound revive for some time. The 4% depreciation in GBP against USD from January to July 2020 improved after the stimulus packages. The pound appreciated by 2.2% against the USD post-July 2020. Again, with the anticipated $2 trillion stimulus package from the US, the pound recovered and reached its highest since May 2018.
How to Safeguard Against the Weakening Pound
Thus, the value of the pound against the US dollar has kept fluctuating, and the future does not look any stable too with the completion of Brexit in 2021. It is, therefore, crucial for investors to protect themselves against the weakening and volatile pound.
Invest in companies with overseas sales
One of the most appropriate ways to safeguard against the weakening pound is to go global. Investors can expand their portfolio to large-cap companies with global exposure and high earnings from abroad. As a result, the returns and performance will get minimally impacted by the slowdown in the UK economy and the resulting weakening of the local currency. The earnings of these companies also become more valuable when converted to the local currency due to the weakness of the local currency.
Invest in funds and indices with global exposure
Investors can also protect themselves against a weakening currency by investing in funds or indices representing companies with global exposure. One of the examples of such indices is the FTSE 100. The index consists of 100 of the UK’s top companies that sell globally. Due to the reduction in the value of the local currency, the goods and services offered by these companies become competitive in other countries.
Protect your money
The best possible way to safeguard against a weak currency is to preserve and protect the value of your invested money. It can be done by transferring your money to a stocks and shares ISA that can help your money grow above inflation. It is crucial to choose an ISA that is flexible, low-cost, and fully managed. A well-managed stocks and shares ISA ensure that you know where your money is invested, how it is performing and considers if you wish to move your investment to securities that can protect you against currency volatility.
Thus, weakening currency is a threat to your money; however, if you manage your investments well, you can safeguard against the risks associated with the volatility. The investment portfolio should be overhauled and modified to protect against inflation and benefit from the weakening currency.