With sterling up a further 3 per cent against a trade-weighted basket of currencies this year, the trend shows every sign of continuing. The key driver has been the European Central Bank's decision to launch quantitative easing. The resultant weakening of the euro has offset the dollar's ongoing rise against sterling.
Should investors care? Companies encourage us to ignore currency headwinds, citing 'underlying' growth rates that show how sales and profits would have performed without exchange-rate moves. But note that this effort is one-sided. A year ago, companies should have been reporting currency tailwinds: sterling was 2 per cent weaker in 2013 than in 2012, boosting the value of international sales. Predictably, however, the effect scarcely featured in management "highlights".
For example, advertising giant WPP opened its preliminary results statement this year: "Despite 6-7 per cent currency headwinds, another record year", followed by "billings at £46.2bn, up 6.8 per cent in constant currency". Last year the first line was: "Billings up 4.1 per cent at over £46bn", and you had to flick forward several pages to learn that this would have been 3.6 per cent in constant currency. As WPP's various PR agencies know better than most, results statements are an exercise in presentation, not communication.
There is also an academic argument that investors should ignore currency. My colleague Chris Dillow has shown that stock markets tend to do better when their currency is sinking. He concludes that investors should not invest in US stocks just because they think the dollar will appreciate against sterling - as many do now.
I agree with that as a general rule, but would add - somewhat inconsistently - that a weak currency outlook can be a valid reason to avoid specific stocks. I was reminded of this by the recent annual results of Japan Residential Investment Company (JRIC), a London-listed investment trust that owns an unhedged portfolio of homes in Tokyo, Osaka and Nagoya. As this magazine's property correspondent, I tipped the company's shares in May 2013 on the basis that the Japanese housing market was taking off. And so it did - but all the property gains so far have been eradicated by the plunging yen.
I can hardly blame the commonly held notion that currency moves are impossible to forecast: prime minister Shinzo Abe's commitment to devaluing the yen featured prominently as a 'bear point' in my write-up. Instead, I might point to the tendency of stock analysts to get caught up in self-contained 'underlying' stories - and forget that macro trends ultimately beat micro detail.
There is an obvious parallel with the eurozone now. Will quantitative easing have the same effect on Europe as it did on Japan two years ago - boosting the stock market in local but not international terms? Perhaps not to the same extent: the ECB plan is not as radical as Mr Abe's, and the eurozone, unlike Japan these days, runs a big trade surplus, which should support the euro. But we all have to learn from our mistakes, and I would not be rushing to buy shares in a European property company just now, even though the market looks ripe for recovery.
Investors need to pay attention to both currency moves and constant-currency performance - the former because it affects what companies can afford to pay in dividends, the latter because it shows the health of the underlying business and market. And if future currency shifts are in most cases unpredictable, that's no excuse for ignoring recent shifts that have yet to be factored into the forecasts provided by stockbrokers. These are notoriously slow to update their numbers on the back of currency moves - understandably, given the volatility.
"Currency doesn't necessarily move share prices on results day, but it creates the mood music that can drive share prices afterwards," says Charles Hall, head of research at Peel Hunt. Judging by currency shifts in the first quarter, the current mood music on the UK stock market is mournful for euro earners and jubilant for dollar earners. Don't buy stocks just because they offer US exposure. But do bear in mind that big upgrades are in order for companies with major US operations.
