When we posted our last blog at the beginning of April, Trump had announced his tariffs on ‘Liberation Day’, global stock markets were falling, and everyone was wondering how low they would go. Fast forward to now, the S&P 500 is at an all-time high with global stock markets posting positive gains over the quarter.
Despite the above, returns have been more muted for most of us in the UK compared to our friends who invest in dollars. The reason is currency. Currency often gets forgotten when people talk about risk (most people are concerned with the risk their investment goes down). But it is possible for the value of an investment to rise in one currency and fall in another. We have had a bit of that going on since the start of the year, as the US dollar has had its worst start to the year since 1973. This is due to tariffs, sticky inflation in the US and the lowering of US credit rating which is affecting the dollar’s status as a global safe haven.
In the UK, we have benefitted for a while from a strong dollar and a weak pound as the value of all our US equities rose in pound terms, even without stocks moving upwards. The opposite has happened this year as the strengthening pound against the dollar has acted as a headwind for returns. As an example, the S&P 500 returned 10.9% in dollar terms, but only 4.5% in pound terms over the quarter. A good result but less than half that of a dollar investor.
You can reduce currency risk via hedging. However, this isn’t generally recommended with equities as equities themselves are volatile, so hedging currency does not meaningfully reduce volatility. This is not true of bonds, where currency movements can be large compared to movements in bond prices and hedging back to sterling is generally recommended.
As ever with most of these potential quandaries in investing, trying to time when was a good time to have hedged your portfolio is as futile as trying to time when Trump will next make a tariff announcement (and likely subsequent U-turn). Your best option is to not waste any time thinking about these things, sticking with your plan of investing in a globally diversified portfolio, leaving it well alone for a good amount of time, and investing your time and energy into other areas of life.