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Pound plummets as FTSE soars

Pound plummets as FTSE soars

Category: Investments

Updated: 04/10/2016
First Published: 04/10/2016

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

A second significant fall in the pound has taken place this year, following the Prime Minister's keynote speech at the Conservative party conference and her assertion that Article 50 will be triggered by the end of March of next year. While this drop may be unhappy news for people who are about to go on holiday, it has given the FTSE 100 quite a boost, as it has passed the 7,000 mark for the second time in as many years.

Broken records

The FTSE 100 previously broke through the 7,000 mark in March 2015, after which it fell back down following international economic uncertainty, to reach a low of 5,537 in February 2016. Since then, it has risen by 25% to stand at the current level.

The FTSE 250 also stands at a record high of 18,460, while the pound is down from $1.45 to $1.28. This is the lowest conversion rate against the dollar since 1985. But aside from possibly impacting your future holiday budget, what does this all mean for you?

Investments ahoy

If you don't have any investments such as a stocks and shares ISA, it might mean very little. You may have witnessed some price increases following the pound's plummet at the end of June, or you may have felt no difference at all. The same is likely to occur again now.

If you do have investments, you may be cheering the current news, but Nick Peters, multi-asset portfolio manager at Fidelity International, has called for caution: "Investors may feel optimistic now that the FTSE 100 has broken through the 7,000 barrier, but we might not want to crack open the champagne yet. The market has primarily been boosted by the sharp depreciation in sterling post-Brexit, with the pound having fallen by around 13% from its pre-referendum highs. Around 75% of the earnings from FTSE 100 companies come from outside the UK, so sterling depreciation effectively makes these earnings worth more.

"In essence, the boost to the FTSE 100 has come about because investors believe the UK economy is in a worse place … Going forward, sterling is likely to depreciate further so we could see the FTSE 100 head higher still."

Risk versus reward

So should you stay or should you go in terms of your investments? As our guides mention, the investment market always has a larger risk attached to it. All investments, including a stocks and shares ISA, require time – it is generally advised to keep your money in an investment ISA for at least five years. Even in these unprecedentedly uncertain times, this still holds, as fluctuations remain a normal part of investing in the stock market.

Tom Stevenson, director of personal investing at Fidelity International, expanded on this using their own data: "As the pound plunges to a three decade low, the FTSE 100 has broken through the 7,000 barrier, reaching 7,076 this morning, close to its highest ever … This is obviously good news for UK investors … But it should be remembered that the main reason shares are rising today is the remarkable slide in the pound to its lowest level since 1985.

"Can the market go further from here? Despite coming close to a new high, the valuation of the UK market is not excessive and investors still look to shares for income, growth and stability. It's difficult to predict the best time to be in and out of the market, especially as the best and worst days very often tend to be bunched together during periods of heightened volatility. It's far more sensible to stay fully invested through market cycles as missing even a handful of the best days in the market can seriously compromise your long-term returns.

"According to our analysis, an investor who invested £1,000 in the FTSE All Share index 30 years ago but missed the best 10 days in the market since then would have achieved an annualised return of 6.93% and ended up with a total investment of £7,484.11. That compares with an annualised return of 9.22% and investments worth £14,116.61 if they had stayed in the market the whole time – an opportunity loss of £6,632.50. If the investor had missed the best 20 days, their annualised return would be 5.40%, which would have left them with just £4,845.30."

What next?

There's no doubt that this is a good day for investors, so why not see if you can take advantage with your own stocks and shares ISA? Just make sure to read up on the risks involved before you take the plunge, and don't invest any funds which you can't really afford to miss.

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.