The longer trend for a stronger pound has been great news for holidaymakers this summer, but it has been tough on
Complaints about the effect of the strong pound have been rife in the recent reporting season, as countless firms have blamed sterling for disappointing half-year figures.
More worryingly still for investors, main market dividends paid during the second quarter of this year rose a pitiful 1.2 per cent, from
Looking across the stock market, it is easy to see why currency fluctuations have such an impact. Within the
When the pound is strong, this makes a big difference.
In Shell's case, for example, chief executive
Unless there is a marked change in sterling's fortunes, brokers anticipate a quarterly payout of little more than 28p this year against 28.7p in 2013, even though it has risen in dollar terms. The effect is particularly obvious for firms reporting in dollars, but global businesses which deliver their figures in sterling suffer too.
Analysts hope dividend payments will pick up by the end of the year. Forecasters at Capita suggest payouts for 2014 will rise 3.5 per cent on the year before to
That is better than the lacklustre 1.2 per cent for the second quarter, but is still well down on recent years. In 2012, dividend payments were 10 per cent up on the year before, as the
Even the junior AIM market is exposed to the vagaries of foreign exchange movements because it is so international.
Many of its companies are based abroad and more than 160 – about a fifth – report in dollars.
They do so because their business is largely conducted in the American currency, whether they are gold explorers, oil tiddlers or IT developers.
If revenue and cost are in the same currency, the effect is negligible. Challenges arise if sales are in one currency and costs in another, which is why so many companies have been moaning about sterling lately.
Their complaints have hit share prices. The AIM index has fallen 15 per cent in the past six months and sterling's strength played its part. On the dividend front the effect is more subdued as only 194 firms on the index – fewer than a quarter – pay a dividend.
Some, such as
Investors frustrated by the lack of growth should bear in mind that currencies rarely stand still. The pound may be the Popeye of the foreign exchange market now, but next year the dollar may be in the ascendant.
Firms rarely attribute earnings growth to rates working in their favour, but when the greenback rises many
And for investors who really want to reduce currency fluctuations, the
The more recent weakness of the pound may continue and provide some relief for investors whose portfolio is exposed to foreign currencies. But investors should be wary of focusing too much attention on currency risk.
Fundamental growth prospects, management determination and drive and the way a firm conducts its business are still more important considerations.
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