The performance of British companies is influenced by different factors, and the exchange rate is one of the most significant. Its effects aren’t just limited to companies operating in the international market, selling their products and services across borders, but also to those that import raw materials from abroad or rely on external companies for specific services.
Getting to grips with these effects is essential for those who run a business, whether large, medium or small, as well as for investors, particularly those who focus on company shares and bonds. When you build your portfolio with Moneyfarm, you must therefore also pay attention to this factor and the advantages or disadvantages it can bring to the companies you are investing in.
In this article, we will find out what exchange rates are, how they affect the performance of UK companies and what impact they have on investors.
Exchange Rate Definition
The term “exchange rate” is related to the value ratio between two currencies: for example, how many euros or dollars you can get for one pound sterling.
This number isn’t set in stone, but it’s constantly changing. Actually, it is affected by economic and market factors as well as political and social events. This volatility is why business owners who deal with foreign countries have to pay such close attention. The exchange rate can be decisive for their business, so they need to keep up to date in order to best define their commercial strategies and improve their business.
Import vs. Export: The Exchange Rate Effect
What exactly are the effects of exchange rates on British companies? As mentioned, this factor affects both companies that import products from abroad and those that export them. However, the effect is the complete opposite for each group.
When the pound is strong against another currency (meaning it has a higher value):
– those who purchase goods or services in countries with weaker currencies benefit significantly, as they can buy more raw materials for the same amount of money or reduce the cost of services. This leads to lower their overall costs and helps to increase profits;
– those who sell their products or services abroad, in the same countries, find themselves in a difficult position, as foreign customers face higher costs. This can lead to a decline in demand and a reduction in profits.
On the contrary, a weak pound favours exporters, as it makes their products cheaper for foreign buyers, turning them more competitive and boosting demand. But this makes life harder for importers, who suddenly have to cope with more expensive raw materials and services.
The Impact on Investors
Anyone investing in securities from British companies must take these factors into account, as they have a direct impact on companies’ profits and its ability to compete, which can affect the value, yield and stability of securities.
As a general rule, shares in exporting companies might perform better when the value of the pound weakens. On the other hand, shares in importing companies might get a boost when the pound is stronger. Of course, the performance of shares and bonds isn’t only influenced by exchange rates. This is why non-professional should always seek help from an experienced financial adviser before making important decisions about their investment portfolio.
