How Does the Pound Move Forward Post EU Referendum?
The new economic normal after Britain voted to withdraw from the European Union on June 23, 2016, is one of uncertainty.
Some investment experts see Brexit as much ado in a teacup, while others advocate extreme caution regarding UK investments. The weakened pound may or may not be good for the British people and the country’s residential real estate industry.
We’ve gathered expert opinions, advice and opposing views on the effect of Brexit on Britain (if any), and what can be done with a devalued currency after the exchange rate tumbles.
A Look at the Pound
Investment expert Jay Taylor says increased market risk will be something traders will have to expect well into the future.
As for the value of the pound itself, which rebounded somewhat from its initial 15 percent plummet to a 31-year low, Taylor writes: “There are hopes of a recovery, but at the moment most traders seem to still be avoiding the British currency.”
Indeed, investors who had part (or most) of their portfolio tied to the pound would, at the very least, “realign their investment strategy to reflect the change in value of [that] base currency,” theorises Moneystepper’s Graham Clark.
Taking the Long View
The pound is relatively cheap right now, and that has some currency traders excited.
“It seems like it’s going to be a testing period for people purchasing a foreign currency,” writes Dayle Littlejohn, a currency trader at Pound Sterling Forecast. “However, if you are selling a foreign currency to buy pounds, you are in a fantastic position compared to 3 months ago. For example, if you trade 200,000 EUR into sterling today compared to before the EU referendum, you will now receive an extra 20,000 GBP.”
For long-term investors, who see Brexit as just another driver in the ebbs and flows of financial markets, investing in the pound might also make sense. Barry Ritholtz, chairman and chief investment officer of Ritholtz Wealth Management, puts it another way in his Washington Post article: “Long-term investors pay attention to short-term distractions at their own risk.
“If you are a long-term investor — think decades or longer — why would you even care about short-term events like Brexit?” he asks. “Look at long-term charts of US equities, and seminal events like the John F. Kennedy assassination, Nixon’s resignation, the 1987 market crash, and the Sept. 11, 2001, terror attacks are hardly visible.”
The investment service Betterment is another that concurs with this approach. “Disciplined, long-term investors shouldn’t overreact to Brexit news by reallocating, withdrawing, or chasing performance,” writes Dan Egan, the company’s director of behavioral finance and investing.
He quotes Warren Buffett: “The stock market is a device for transferring money from the impatient to the patient.”
The Ripple Effect
While the lower pound might be good for currency traders and British exports, it isn’t doing much for housing or finance, says Alain Naef, a University of Cambridge Ph.D. candidate in Financial History.
“What would help [the] sterling recover is positive news about the balance of payment,” Naef adds, “a rise in interest rates or overall economic growth. But due to all the economic and political unrest following Brexit, none of this is likely to happen in the near future so a further depreciation can be expected.”
And it’s not just the UK economy that has been affected and will continue to feel the effects. As one of the world’s largest economies, Britain spends billions of pounds each year on imports. If the buying power of the UK is reduced long-term by a weakened pound, its trading partners will feel the pinch.
Money coming into the country via investments could be slowed as well, says Dr. Andrei Nikiforov, professor of finance at Rutgers University, writing for the International Business Times.
“Many large businesses, unsure of future access to the common European market for goods and services, will most likely postpone or even freeze their major investments in the UK. And because global business is so interconnected, the prospect of a worldwide economic slowdown becomes more plausible.”
Narendra Nathan of The Economic Times of India agrees: “The immediate impact of Brexit is an increase in risk aversion when it comes to investing.” He goes on to quote the chairman and managing director of India’s leading share trading company, Motilal Oswal, as saying: “Brexit is a big, once-in-a-life kind of event. Its consequences will last longer than we can think.”
Fallout Before the Brexit Vote
In fact, the fallout began well before the vote was tallied.
Ross Moffat at Utilitywise calls the period leading up to the Brexit vote a “hiatus on investment” in the energy industry.
“Energy projects slowed or were held back as developers awaited the outcome of the referendum vote,” he writes. “Now that the decision has been made, there will be a prolonged period of uncertainty over the UK’s future relationship with the EU as negotiations take place.”
Still, he notes that several of the UK’s major energy investors have committed to completing ongoing projects. This includes EDF Energy’s nuclear power plant, Siemens’ wind turbine manufacturing centre, and Drax, which owns the largest renewable energy plant in the country.
The Impact of Brexit on the Pound
According to the Financial Times tracker of businesses impacted by Brexit, residential real estate companies, newspaper publishers, retailers, tourism-based companies have either experienced or anticipate a loss.
Jane Denton at This Is Money pushes back against Brexit negatively impacting tourism, however. She says the cheap pound actually gives UK tourism a boost, with visitors from abroad enjoying the the “best exchange rates in decades.” She cites strong demand from the US and China, and says bookings for flights to the UK from within Europe have increased by 5 percent, with international bookings up more than 7 percent.
Interestingly, financial brokers; fast food operations such as Domino’s Pizza and Just Eat; the telecoms group BT; and National Express, the bus and rail operator, all forecast that Brexit will either be a boon for their businesses or won’t adversely impact profits.
But the low pound is hurting the British economy in other ways. Natasha Lomas at TechCrunch says British companies that employ Eurozone staff and pay those people in Euros are facing stiff increases in salary expenses. Additionally, UK-based job opportunities denominated in pounds are suddenly less attractive to talented job-seekers from around the EU.
“On the flip side of a fallen pound,” continues Lomas, “UK startups are now cheaper to foreign investors. And, if the UK economy heads for recession — with the accompanying knock-on effect on rents and house prices — the cost of living in London might become more affordable, in theory boosting its attractiveness to lower waged startup workers.”
The team at MoneyWeek’s research publication Capital & Conflict say that the situation offers both short term risks and opportunities, but that ultimately Brexit could be a “long-term positive for the UK economy.”
In their guide for British investors and savers, the team recommends investors diversify multi-asset portfolios, and rebalance them annually. British government bonds (gilts) are actually looking less risky than most European countries, while gold is still seen as a “traditional ‘safe haven’ asset.”
Proceed With Caution
Investment manager Mike Deverell writes at Fund Strategy that while some see Brexit as very nearly a non-event in terms of economic doom, he’s not that sanguine.
He says gilts are a “more representative indicator of how market participants see Brexit affecting the economy.” The yield on the 10-year bond dropped nearly 50 percent (from 1.5 to 0.85), and will likely bottom out at about 0.25, where it will remain for some four years.
“The outlook is at best uncertain,” Deverall ends, “and it makes sense to hold more cash than usual. UK commercial property, already slowing before the referendum, is best avoided completely.”
Dominic O’Neill at Euromoney says Brexit saw an investor flight in the UK’s commercial real estate market, including trusts and companies. “Shares in Land Securities — the UK’s largest listed commercial real estate company — fell 20% in the days after the vote,” he reports, “while London-focused Great Portland Estates fell even further.”
That said, with the Bank of England bringing interest rates to a record low (and possibly going negative), it’s business as usual at HSBC, according to Richard Choi, head of real estate investment banking. “We’re open for business and we have plenty of deals in the pipeline,” he says, “but clearly we need to be cautious given the market dynamics, as any other bank.”