All Hallows’ Eve beckons; traditionally a night to remember past loved ones but now mostly a chance for children, and also celebrities it seems, to dress up, party and frighten their neighbours, armed with toilet paper and extorting for sweets (bad news for florists but good business for costume retailers, confectionists, dentists and perhaps those needing toilet paper on the walk home from a few too many drinks).
For many of us, today also marks something more worrying than Halloween - the end of another terrible month for the British pound. Sterling weakened a further 6.2% in October making it the worst performing currency; this after already falling 8.6% in June and further in July, August and September. In fact unless one is planning to travel to Angola, Nigeria, Venezuela, Mozambique or Suriname (and not use dollars) a Brit will find themselves worse off anywhere in the world compared to the end of 2015. Moreover the contrasting rally of a number of emerging market currencies means that their spending power in Brazil, Russia, Japan or South Africa is now between 40% to 50% weaker. The currency moves, mostly on the back of the Brexit vote, looks likely to last. But how near the top of global concerns should the unfolding of Brexit be for investors?
Many familiar Brexit fears remain worrisome, but some aspects may be dressed up more frighteningly than in reality. First the obvious, one must remember that UK debt is denominated in our own sovereign currency. It is unfortunate that the Government’s austerity policy took little advantage of the lowest borrowing costs and is now expressing more of a desire for a fiscal boost just as Gilt yields rise. But even though the UK’s public debt and deficit remain unsustainable, its sovereign control of its monetary policy and increasing distance from the Eurozone slow motion car crash shift if more to the periphery of market concerns. Additionally, an export boost from a weaker currency is far from certain as many intertwined industries will face rising foreign import costs and higher international borrowing costs. Furthermore, of course, the average consumer is starting to feel the pinch of rising prices, sometimes disproportionately so; according to FT analysis it is now possible to buy your Apple laptop from Canada, pay for the transatlantic airfare and still have money left over.
The positives mostly stem from the international activities and investments of many UK businesses. In fact around 75% of FTSE 100 companies have mostly overseas earnings. Moreover UK banks and financials have for many years suffered weak returns from the emerging market investments which will at least receive a boost from the recent relative depreciation of their reporting currency. Correspondingly the City’s negotiating strength for continued financial services rights still seems to be underestimated; its potential to continue as an international financial hub on a standalone basis is something the EU must be more wary of and should help make the terms of some expanded equivalence model look more tenable. But for now the continued legal ambiguity makes most projections or economic forecasts inadequate.
The uncertainty surrounding the UK’s economy and future could continue to bring about some value opportunities that fit within our investment model. Although heavily indebted publically the net international investment position when accounting for valuation adjustments is nowhere near the critical levels faced by many struggling peripheral Eurozone countries and allows for discerning investment and monitoring. Mostly however we remain keen to invest with net creditors that continue to offer attractive yields relative to their ability to fulfil their obligations.