Natasha Prayag
By Natasha Prayag
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The theory of relativity – or how currency can hit your portfolio

Currencies are a funny thing.

If you are spending money on something that is produced in the same country as you are buying it, you are unlikely to realise its value is dictated by one of the largest markets on the planet.

A Cornish pasty, baked in Truro with British wheat, beef and potatoes, should not be at the will of turbulent currency markets, which see more than $5 trillion in dealings a day.

However, a pizza margherita baked in the same city but with Spanish tomatoes, Italian Mozzarella and Greek olive oil, is another matter.

Due to the goods being brought from the eurozone, the pizza is likely to experience price fluctuations, based on the currency its ingredients were purchased in.

And while the quality of the tomatoes, beef or olive oil doesn’t alter depending on the cost to global consumers, their relative value is based on something really important for investors.

£5 is £5 in the UK. But in Italy £5 can be worth anything — from 40p to £400 – depending on how the currency market is feeling.


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If the market is confident the UK is forging ahead, the pound will be strong and other countries will need more of their currency to buy whatever the UK makes. If the market thinks the reverse, Italy, Greece or Spain will demand more sterling to cover the amount they are charging in euros.

Since the EU referendum, sterling has slumped against the euro and other major world currencies and although it has climbed back considerably, is not where it once was.

Before we all start looking in the fridge for something to nibble on, this point about currencies is not just important for foodstuffs, but companies of all sizes, too.

A company that produces goods in the UK that are sold around the world in sterling will suffer if the currency falls in value.

Conversely, a company that is based in the UK, but produces goods and sells them outside the country will bring its revenues back home in a currency that is stronger than its own so can (technically) mark up a gain.

Luckily for the UK, there are plenty of companies listed in London that operate in this way, so investors can take their pick, but you must choose carefully. Just because the UK is down against some countries’ money, it is up against plenty of others.

Sterling might seem to be in a slump to us right now, but those spending Argentine pesos would swap tomorrow.

Everything, especially in currency, is relative.

Learn more about Brexit and find popular markets here.

 

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