Looking forward, business confidence slipped to 17-month lows. Recent key economic data from the UK has been showing signs of decline: the S&P Global flash Composite Purchasing Managers’ Index (PMI), which is a monthly gauge of the services and manufacturing industries, fell to 53.1 in May, remaining well below the 58.2 from the previous month to mark the lowest growth rate in 15 months, as UK private sector firms recorded a slowdown in growth of business activity and new orders, pressured by rising inflation. The greenback’s strength in recent months has been supported by the Federal Reserve’s cycle of rate hikes and some weakness in the British economy, which looks to be slowing and facing a potential recession. Meanwhile, British investors holding Japanese assets would have been wise to hedge against exchange rate risk with an instrument that gives this option.Ĭoncern about the war in Ukraine, energy scarcity and the impact of Covid-19 lockdowns in China on global economic growth has driven investors toward safe-haven assets like the US dollar. In this case, Japanese investors holding pound-denominated assets have benefited from the strength of the British currency – the yen-denominated Morningstar UK Index gained only 8.7% between January 1 and June 9, while the return in pounds is 0.7%. The value of the pound against the Japanese yen rose about 7.5% so far in 2022. As a result of the same dynamic, the Morningstar Japan Index shed 8% in pounds, while the benchmark’s performance in Japanese yen is -0.6%. Inversely, the Morningstar Eurozone Index shed 10.2% in euros since the beginning of the year, while its version in pound sterling lost 10.6% over the same period. If the foreign currency appreciates against the local one, the effect will be positive, while a stronger pound would have a negative effect on overall performance of the investment.įor instance, the Morningstar US Market Index dropped as much as 14.3% for the year-to-date in US dollars, meanwhile it lost “only” 9.7% in pounds, thanks to the favourable exchange rate for British investors. The return of foreign securities consists of the asset’s market performance and the performance of the currency in which it’s priced.
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