Brexit Bears Keeping Investors at Bay
The FTSE 100 index is currently trading at 7,542.87 (October 18, 2017) near record highs while GBP continues to flounder. The relationship between the strength of the currency and the UK all share index is an interesting one. Since the Brexit referendum on June 23, 2016, the pound has plunged from 1.48 to around 1.32. Along the way, it bounced off a 31-year low and briefly rallied towards the mid-1.30’s before stabilizing in its current range.
For UK traders and investors, the performance of the currency is a little concerning. Weakness in GBP translates into higher import costs of raw materials, housing supplies and components, and consumables. Viewed in perspective, personal disposable income levels are falling while inflation is rising. On Tuesday, 17 October UK CPI data was released indicating inflation picked up from 2.9% in August to 3.0% in September. Unfortunately, real wages have only grown by 2.2% indicating a 0.8% shortfall.
Brexit Pressures Mount
UK investors are increasingly concerned about two issues: the nature of a Brexit deal (hard Brexit or soft Brexit) and the prospect of a protracted bear market. Since the global financial crisis, investors have enjoyed a bull run. Even before the Brexit referendum in June 2016, there was growing concern about overinflated stock markets. A correction (a downward revision by 20%) would wipe trillions of dollars off global markets. However, in Britain a more ominous concern is a ‘No Deal’ scenario. If Prime Minister May and Brexit secretary David Davis fail to secure a blueprint for Brexit, UK enterprises and investor confidence will be adversely affected.
Prime Minister May was working the phones overtime this week, attempting to hammer out a preliminary framework for Britain’s extrication from the EU. While her counterparts overseas did not commit to anything substantial, indications are that EU regulators such as the European Commission, perhaps even the European Court of Justice will be more lenient with the UK. Precisely when investors should exit equities markets is a tough question to answer. The reversal is coming – of that there is no doubt. However, for that to happen in the UK the GBP would need to strengthen markedly.
Confidence boosting measures for sterling include things like hikes to the bank rate by the Bank of England, reversals on Quantitative Easing, and tentative agreements between the UK and the EU on Brexit. Manufacturing PMI, consumption data and related UK economic indicators can certainly boost the performance of the UK economy, but the Brexit saga lingers in the background. Investors may opt for cash holdings over stocks, but the depreciating nature of sterling is worrisome. Consider that £100,000 was worth $148,000 on June 23, 2016, and now that same cash investment is worth $131,000.
Investments in UK Owned Foreign Companies Are a Sure Bet
Perhaps the most pressing concerns for the UK economy is domestic consumption. For now, falling real income levels and rising inflation are eating into the PDI’s (personal disposable incomes) of UK consumers. Less cash in hand translates into lower purchases with things like immovable property, vehicles, big-ticket expenses etc. These are the drivers of UK economic growth, and a downturn in these sectors could send FTSE 100 index investment spiralling lower. There are many profitable opportunities in a bear market, notably UK companies invested abroad. That’s precisely why we are seeing such strong returns on the FTSE 100 index. EUR, USD, JPY, SEK and CHF investments are worth significantly more in GBP, and this raises the stock prices accordingly.
Other key sectors include FinTech enterprises. The UK remains at the forefront of European innovation, and technical supremacy. A Brexit may cause a mass exodus of foreign-based corporations from the City of London and surrounds to other capitals around Europe, but UK enterprise is resilient. Another sector that is grossly undersupplied is UK housing. While Brexit concerns will cut into the housing market’s profitability, there is still significant demand for housing in the UK. There is increasing interest among foreign buyers in UK real estate, owing to the cross-currency exchange rates.
Do you feel that the UK is able to withstand Brexit pressures in the coming year? Are you going to sell off your stocks in favour of cash holdings, or foreign currency?
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About Brett Chatz
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for spreadbettingreview.co.uk.