Overall, investing markets had a mixed month with the US performing strongly while the FTSE100 struggled in September. Underneath the headlines though, two key themes emerged.
Sterling strength
The much maligned Great British pound is at a multi year high versus many major currencies. This makes it a great time for a holiday and to be spending abroad as you get more dollars and euros than before, but it also has an impact on investing markets. £1 currently buys you about $1.33 and while this is a far cry from the days when you could get nearly $2 per £1, it’s also a long way from the far more recent instance of near parity between the pound and the dollar, days after Liz Truss’ infamous “mini-budget”.
The pound has risen more than 5% against the dollar in 2024 alone. This means that you get more dollars for your pounds when going on holiday but crucially from an investment perspective, you get less pounds back for your dollars if you are investing in US companies. It also has an impact on earnings for UK companies as we will see later on.
Take a very simplified example. Let’s imagine you convert £100 to $100 (simplified example, not actual exchange rate) to invest in US company A. Now, let’s imagine that the company’s stock does well and grows 5% to $105 . However, if the pound also appreciates 5% against the dollar, as it has done in 2024, this would wipe out the gains of the company’s stock price.
So, while the US stock market has performed well so far in 2024, UK investors have suffered slightly from the strength of the pound. Changes in foreign exchange rates are notoriously hard to predict (generally more so than stock prices) and it’s also very difficult to protect your investments from currency fluctuations. We should however be aware of how currency moves have affected our investments when reviewing their performance.
China stimulus
Meanwhile, the Chinese stock market has been one of the few global stock marketsThe global network of stock exchanges that lets investors buy and sell shares in publicly listed companies. to perform poorly in 2024. That was until the Chinese government stepped in in the second half of September, announcing an enormous $114bn stimulus package designed to support the stock market. Measures included cutting interest rates, easing restrictions on borrowing to invest in stocksStocks, also known as shares or equities, represent units of ownership in a company. and encouraging companies to buy back their own shares. Measures were also introduced to stimulate the struggling Chinese property market, with the deposit required to purchase second homes cut from 25% to 15%.
The Chinese stock market has reacted extremely positively, up over 25% since the measures were announced. This example highlights the opportunity and risk of investing in so-called “emerging markets”, where governments can intervene in the stock market in ways that would be unthinkable at home. As such, when thinking about investing in emerging markets, consideration should be given to doing so as part of a diversified long term portfolio.
FTSE 100 and S&P 500 performance
The FTSE 100The main stock market index in the UK, the FTSE 100 tracks the performance of the 100 largest companies on the UK stock market. fell 1.67% in September, in part because of the strength of the pound mentioned above. When UK companies make money overseas, as the majority of the FTSE100 do, they must convert those revenues back into sterling when reporting their revenues and profits. When we are getting less pounds for our overseas currency, that hits the profits and therefore the share prices of FTSE100 companies.
By contrast, the more domestically focused FTSE250 (the next biggest 250 UK companies) was relatively flat for the month (-0.16%), with one factor being those slightly smaller companies are less exposed to overseas revenue.
The US market continued its strong year/decade with the S&P 500 rising 2.46% in September in what has typically been a poor month for US stocks. This brings the total gain of the US market to over 20% in 2024, before dividendsThe amount of profit that a company returns to its shareholders. are accounted for. The US central bank cutting interest rates by 50 bps in mid September sparked the latest positive stock rally in the US with Federal Reserve Governor Jerome Powell suggesting more rate cuts were possible before the end of the year.
As always, it’s worth remembering that if you are interested in markets it can be useful to understand what moves investments in the short run, but it’s also a completely reasonable and sensible strategy to ignore short-term noise. In reality, nothing that happens in the market should impact your financial plan – and if you’re investing for five years or more, these short-term market movements are part of the journey.
All investing should be long term (min. 5 years). The value of your investments can go up and down, and you may get back less than you invest.
1 Google Finance, 1 September – 30 September, 2024