The Daily Update - Be careful what you wish for...

The UK’s vote to leave the EU is biting back with sterling extending losses against the US dollar, falling to its weakest level since the GFC. Despite recent economic data such as retail sales surprising on the upside sterling is being pounded by worries over a 'hard Brexit'. The pound is now over 16.5% weaker against the dollar year-to-date and has plummeted more than 18% against the euro, at time of writing. In fact the currency is one of the worst performing against the greenback so far this year; worst than the Argentinian Peso, and sitting ahead of the Angolan kwanza, Nigerian naira and the Venezuelan bolivar! Former BoE governor Mervyn King yesterday claimed that the weaker pound is a 'welcome change' adding that the Brexit concerns are ‘over the top’. He went on to comment that during the referendum campaign, it was noted that Brexit would push inflation higher, and that house prices and sterling would fall; basically what the BoE has ‘been trying to achieve for the past three years and now … have a chance of getting it.’

The Gilt market has also taken a beating with the benchmark 10-year trading above 1% during the session today; as concerns over fiscal spending and the weaker sterling increased. The combination of a weak currency, higher inflation and increased government spending (at record low borrowing levels) may put even further pressure on the the Gilt market. The market’s expectations for a surge in inflation has pushed the 5-year, 5-year GBP inflation swap rate up ~24% to 2013 levels; from the lows at the end of July.

As all our funds are US dollar denominated we have very little exposure to sterling currency moves. Across our portfolios we hold a couple of sterling bonds; the likes of state-owned Russian Railways 7.487% 2031 which has rallied over 29.5%, and Scottish Widows 5.5% 2023 has gained 8% on a total return basis year-to-date. Both bonds continue to offer attractive risk-adjusted returns of 18.2% and 12.7% with yields of 5.8% and 4.2%, respectively. Although denominated in sterling, these bonds are fully hedged so our exposure to sterling is zero.

Meanwhile all good things come to those who wait; so the saying goes. The decision which has been talked about for more than 25 years, has had a recommendation since 2000, and had millions of man hours spent debating looks like it finally might be coming to a head. We are of course talking about the decision to expand airport capacity in the south east at either Heathrow or Gatwick. Heathrow has long been the favourite to gain a third runway and yesterday the Scottish government said it would be backing the scheme; believing that expansion to the UK’s and Europe’s busiest airport would create up to 16,000 jobs in Scotland on top of the economic and strategic benefits. SNP yesterday signed a memorandum of understanding with London Heathrow Airport which includes investigating the use of state-owned Glasgow Prestwick airport as a logistics hub for construction of an additional runway. The decision is expected to be made ‘shortly’ at the sub-committee for aviation gathering chaired by PM Theresa May, who favours expansion at Heathrow over Gatwick.

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