Theresa May signing Article 50 confirming Britain’s exit from the EU this week was a timely reminder of the doom and gloom that was predicted following the vote last year.
Most of the predicted negativity failed to materialise and, following a small dip after the referendum in June, the FTSE 100 surprised investors and commentators alike with a strong recovery.
Within three months, the FTSE Index had risen 10.4%, but the pound fell by 12.8% against the dollar over the same period. It also fell a significant amount against the Euro during this time.
Whilst this means your holiday spending money doesn’t buy you quite as many margaritas as before, the rise in the FTSE has given a very welcome boost to your pension and ISA funds.
The performance of some savings, such as ISAs and pensions, are linked to the performance of the FTSE and according to top Yorkshire IFA, Stephen Baxter, understanding where the opportunities are is key to maximising them.
“Most pension and ISAs have some element of exposure to the FTSE 100 and missing out on unexpected boosts to markets can have a significant effect on your retirements and savings plans,” said Stephen, whose firm offer a ”˜full circle approach’ to financial planning for high net worth individuals, charities and trusts in the region.
“Whilst there are other reasons involved, the main factor in the FTSE rise was the performance of the pound.Â A large proportion of the profits made by FTSE 100 companies is made in dollars.Â If sterling weakens then dollar revenues, once converted into sterling, are worth more,” he added.
A simple illustration of currency movement helps clarify the point. If the exchange rate was $2 to the pound than every $1000 of revenue would be worth Â£500.
However, if sterling weakened and the exchange rate moved to $1.5 to the pound, every $1000 of revenue would be worth Â£667.Â Revenues have therefore increased by a third as a result of the fall in sterling.
When the sheer volume of profits earned overseas is factored in, the effect becomes even more pronounced.
“The vast majority (97%) of FTSE 100 companies are domiciled in the UK but a staggering 71% of the revenues for these companies come from outside the UK,” added Stephen.
“It’s important to note that a large amount the overseas revenue is accounted for by France, Germany and other Eurozone countries, so the strength of sterling against the Euro is also very important.
“When considering how this will affect your pension and ISA, it is very important to get the right advice and then review your investments regularly to ensure you make the best of opportunities that are available to you.
“Above all, the performance of the FTSE 100 since the Brexit vote has shown how important it is to be in a well-managed investment portfolio for the long term.