Watching the pound is important for UK investors

Weighed down by the strength of sterling, investors in UK equities have suffered a tough start to 2018 with both the FTSE 100 and FTSE All-Share indices registering negative returns in January.

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With the sterling rising 4.65% versus the dollar, 1.85% against the yen and up 1.54% compared with the euro, the FTSE was one of the only major indices to fall in local currency terms in January.

Over the month, the FTSE 100 fell 1.96%, the FTSE All-Share was down 1.93%, while the FTSE 250 index fell further, dropping 2.24%, all leading to negative returns for UK invested funds.

The worst hit was the IA UK Equity Income sector, where the average fund was down 1.04% in January, while within the UK All Companies sector, the mean return for the peer group was -0.73%.

Funds in the UK Smaller Companies sector, which was the third best performer in 2017 with a huge gain of 26.56%, managed to weather the storm slightly better, ending the month marginally down 0.07%.

“It’s too early in 2018 to start looking for trends, but in my view currency movements will have a big impact this year,” said Ben Yearsley, a director at Shore Financial Planning. “Sterling’s strong run over the last few months has taken away some of the excellent returns we have seen from global markets.”

Take the US, for example. For the first time in recorded history the S&P 500 made gains in every month of the 2017 calendar year, while the Dow Jones surged to new highs beating the 26,000 mark.

Good year for US active

This lead it to being a good year US active managers, with the average fund in the IA North America sector producing a 10.53% return, beating the 9.08% gain from the S&P 500.

However, thanks to the strength of the pound over the dollar in 2017, the returns UK investors received from the US would have been much enhanced had the currency been hedged in dollars, with the S&P 500 up 19.42% in dollar terms.

“Dollar weakness is one of the strange economic phenomena currently as the US economy is motoring, and with three rate rises last year and three more expected this year the dollar should be strengthening,” says Yearsley. “However, along with China, the US remains the engine of global growth.”

Despite the weak start to the year for the UK, 2018 has started with last year left off, with the China sector leading the way in terms of returns. Havin g returned 36.51% in 2017, making it the best overall performer, the IA China sector saw a 4.2% gain in January as global stock markets in general continued to tick higher.

This strong start to the year, which has seen the Hang Seng Index climb 9.92%, the MSCI Emerging Markets Index rise 6.85% and the S&P 500 jump 5.69% (all in local currency terms) should explain why investors have begun 2018 in bullish mood.

More risk

According to the latest State Street Investor Confidence Index, investors across all regions showing an improved appetite for risk in January, with the Global Investor Confidence Index (ICI) increased to 102.1 in January, a jump of 6.4 points from December’s revised reading of 95.7.

For the uninitiated, the ICI measures investor confidence or risk appetite quantitatively, by analysing the actual buying and selling patterns of institutional investors. A reading of 100 is neutral; it is the level at which investors are neither increasing nor decreasing their long-term allocations to risky assets.

With a rise of 16.0 points in the European ICI to 113.4, it was confidence in Europe which saw the biggest jump in the month, and given the returns in the various sectors last month, and year, you can see why investors are feeling better about life.

With returns of 1.92% and 1.68%, the IA European Smaller Companies and Europe ex UK sectors were the fourth and fifth best performers in January, trailing only Japanese Smaller Companies (3.62%) and Global Emerging Markets (2.43%).

“The bullish start to 2018 can be clearly seen in the make-up of the top performing sectors as riskier areas of the market topped the performance tables with Chinese and Japanese equities leading the way,” says Adrian Lowcock, investment director at Architas.

“Technology, a top performer in 2017, continues to attract investors in a world where growth is still hard to come by and investors are willing to pay for it. While the performance of technology stocks have led some to believe they are bubble forming, so far earnings growth has justified the rise in the share prices of technology stocks, with one or two possible exceptions. The sector has the second best earnings growth forecasts in the S&P, behind the recovering energy sector.”

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