Does UK politics impact investments?

Does UK politics impact investments?

By CIRCA5000 TeamBack to Mission Control

Investment updates • 3 min read

Does UK politics impact investments?

The big shakeup in the British government was hard to miss this week. A slew of resignations by cabinet ministers were followed by the Prime Minister, Boris Johnson, stepping down. Engrossing as these political developments are, we are most interested in if and how they impact investments in CIRCA5000. 

Globally diversified

We offer investments in funds that have holdings in countries around the world. The US, in particular, dominates them. Investments in the UK are noticeable too, in four of six portfolios (see chart).

However, at best, the UK has a 10% share, in Sustainable Future of Food, and is not even among the top 5 country wise holdings in two of the portfolios. 

This means that the holdings are not big enough to have a significant direct impact on investments. Only if there is a massive change in stock prices from the latest developments, can it have a material effect on the portfolios.

Currency Impact

The state of politics can impact investments indirectly, through currency movements, however. Since a large part of portfolios is invested in companies listed on the US stock exchanges, a change in exchange rate can impact returns.

Consider an example. £100 is invested in a stock, when each pound buys you $1.4. At the time of selling the investment, suppose the US$ becomes stronger, and we only need $1.3 to buy a pound back. Even if there is no change in the value of the stock during this time, just because of currency fluctuations, the value of the investment is now up to £108.

If the overseas currency strengthens, your return is increased

There is both good and bad news on this front. The bad news first. The British pound rose slightly after the political changes, which reduces the value of our overseas investments. But the good news in this context at least, is that, in general it has been weakening over time. So in terms of currency effect, it is a positive for our investments.

The real story gets far more complicated than that, of course. The exchange rate is driven by the state of the economy which in turn can be partly determined by political decisions. A robust economy is more likely to have a strong exchange rate and vice-versa. It is typically associated with more jobs, higher incomes and controlled inflation.

Moreover, if other economies are doing well too, returns from overseas investments can be good too even if a strong pound eats into some of our overseas returns. Right now, the economy is in a bad place. We have the solace of a weak pound, but we also need returns.

Think long-term

These returns are more likely to find their way to us if we focus on long-term investing. 

Irrespective of where the economy is at right now or how the currency markets are reacting or what is going on in the political world, history tells us that staying invested for a decade or two is what really works best. 

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