In early July sterling hit a rate of $1.72 against the US Dollar, which was its highest level seen since 2008. Compare this to the rate of $1.68 seen in June and the $1.52 recorded a year earlier.
Several factors have influenced sterling’s ascendancy; including the fact that the US Federal Reserve reduced its economic growth forecasts for 2014, after experiencing exceptionally bad winter weather, to 2.1 – 2.3%, from a previous higher estimate of 2.8 – 3%. Added to this fact, the Fed has continued to reduce its monthly stimulus measures (or quantitative easing) by $10 billion. This is the fifth reduction since the turn of the year.
Whilst reflecting overall good news for the UK economy, this exchange rate level may well impact the sterling based dividend growth from such portfolios.
Nearly 20% of companies in the FTSE100 report in US Dollars, whilst out of the top 20 dividend payers, nine of them base their payment in US Dollars. These companies include AstraZeneca, HSBC, and Shell.
At the turn of this year many fund managers were predicting dividend yield from the FTSE at 6% for 2014, however, given the inexorable rise in sterling against the US Dollar these predictions have been pared back to 4%.
Exchange rates are notoriously volatile, however, and there are several scenarios in the near future which could reverse the trend. In September we will see the Scottish independence referendum (with the adoption of sterling for an independent Scotland a major issue) and then in 2015 the UK’s general election.
All is not bad news though for equity income investors as companies heavily engaged in the domestic market, and thus sterling based income streams, will not be so adversely affected.
To discuss strategies to address these issues in more detail, please do not hesitate to contact us for advice.
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When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do, contact Robert Bruce Associates for individual assistance.
NOTHING IN THIS ARTICLE SHOULD BE SEEN AS GIVING INDIVIDUAL FINANCIAL ADVICE.