Sterling weakness shouldn't mean portfolio panic
As the business week began in Asia, markets gave their first response to various events on Friday.
For those FX traders in Singapore/Hong Kong who focus on GBP, it was the first chance to express a view on the UK government’s ‘mini-fiscal event’. Much like the rest of the world on Friday afternoon, the reviews weren’t favourable, at one point driving GBP-USD to nearly $1.03, as mentioned, an all-time low. Cue the headline writers. Cue the panic.
While we’re watching closely, we’re not panicking or taking any action in portfolios. There are a few reasons:
- The Asian USD/GBP markets are not huge; as you’d expect, most of the trading takes place during Western business hours – so any moves tend to be exaggerated. Remember there’s been no extra economic information since Friday, just a weekend of frantic editorials. Already this morning, Sterling is back above $1.07. That doesn’t mean the shocks are finished – but it’s a reminder to be careful about overreacting when markets are volatile. We’re investors, not day-traders.
- Most importantly, our portfolios are structurally diversified away from UK exposure. As we’ve said time and time again, having all of our eggs in one basket has never been our approach:
Holding foreign currency offers protection against specific local shocks – whether natural disasters or political uncertainty. In our Balanced portfolios, 40% of the portfolio is in non-Sterling currency. We can (and do) tactically increase or decrease this weight if needed – but it’s certainly a reassuring starting point.
Our equity holdings are also extremely diversified; only around 10% of the sales of the companies we hold comes from the UK – the economic health of the global economy is far more important to returns.
Similar to our equity positions, our bond holdings are also globally spread. In a Balanced portfolio, around 2% of the total portfolio is in UK-based fixed income securities, and even in the Cautious profile, the overall weight is less than 10%.
We know that large moves in markets often prompt responses from authorities. We’ve certainly seen U-turns in government policy in the last few years, while the Bank of England has the independence to act unilaterally if needed. Markets don’t exist in a vacuum – things can change quickly.
We’ve been through UK-specific shocks before with Brexit, and our portfolios delivered strong absolute and relative returns. We’ll approach this scenario in the same way on the Investment Management team; apply the same processes and philosophy, and continue to focus on our clients’ long-term outcomes.
Most importantly, our portfolios are structurally diversified away from UK exposure.
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