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Catch a Falling Knife: How to Make Post-Brexit Exchange Rates Work For You

September 23, 2016 Banking / business / Financial Planning / Investing / real estate

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Post-Brexit Exchange Rates And You

While the pound has recovered a few percentage points after its spectacular post-Brexit drop, it’s still feeling the effects of the Leave vote.

Then in August, the currency reacted sharply to the Bank of England’s interest rate cuts, down to 0.25%, with another steep decline. That interest rate drop was the first in seven years, according to MarketWatch, and the lowest in tibtihe bank’s long history.

As if that weren’t enough, “Gov. Mark Carney and fellow policy makers also revived a dormant U.K. government bond-buying program,” Marketwatch continues, “announcing that expanded bond purchases will begin in September.” While reducing government debt is good for any country, the move also means that there will be less cash. Social, healthcare and education programs might be impacted and consumers can expect, at least in the short-term, to have less money to spend.

And while interest rates could still fall to zero, going into negative rates is still not being considered, at least on a widespread basis. Yet.

What it all seems to mean is that the sterling will likely be depressed against other major currencies for some time to come — which translates to opportunities to save and make money.

We’ve gathered expert advice on how to take advantage of the low British pound and opinions on post-Brexit opportunities for investors.

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Property Buyers From Abroad

The weak pound almost immediately heralded a surge of interest in property investment from foreigners. Marc Da Silva, features editor of Estate Agent Today, says the combination of the depressed sterling and low interest rates (which effectively weakens the pound further), is contributing to a sizeable rise in interest from overseas buyers.

“We’ve seen a noticeable surge in enquiries from overseas buyers thanks to the drop in the pound’s value, with those buying in dollars and index-linked currencies delighted by how much more they can now get for their money in the UK,” Ray Withers, CEO of Property Frontiers, tells Da Silva.

It’s not just the weakened currency that attracts investors. The sharp increase in demand can also be attributed “primarily to the fact that the ongoing fundamental strengths of British residential property investments remain intact,” Da Silva writes.

On his blog, Withers talks about how investors can also take advantage of the UK’s continued new housing shortfall. With the combination of that shortfall, the construction that low interest rates spur, and the favorable exchange rate, there are a number of ways overseas investors can benefit.

“Strong demand and an interest rate cut are a great combination for buy-to-let property investors,” Withers writes. “While interest rates have gone down, yields have remained the same, meaning that the buy-to-let profit margin has effectively gone up overnight. Even overseas investors can benefit if they borrow in sterling to fund their U.K. property purchase.”

Chinese investors make up just one group interested in UK high-end residential and commercial properties, Carla Mozee writes at MarketWatch. While the Chinese are looking for a good bargain, they also have faith in the UK.

“The well-regarded educational system, London’s position as a leading global financial center and a perceived higher level of safety compared with other EU countries is what attracts Chinese investors to the U.K.,” estate agent David Wei tells Mozee.

As Chinese investors look to distance themselves from a depreciating yuan, Britain’s low interest rates and the 18.9 percent average return on investment for Greater London rental properties some investors are seeing are particularly attractive.

A Shift in the World’s Financial Centers?

In an interesting piece for Gulf News, lawyer Dr. Habib Al Mulla says Dubai can benefit by attracting businesses away from London, “especially financial institutions, in search of freer, greener pastures.”

He doesn’t limit the beneficiaries of this exodus to Dubai, though. Dr. Al Mulla says Hong Kong and Singapore are natural relocations, alongside other possible safe harbours such as Dublin, Liechtenstein, Frankfurt and Paris.

However, he says Dubai could “offer the financial infrastructure London has thrived on” with a few regulatory changes.

The benefits of doing business of any kind in Dubai are well known: It has a central location, stability, government services, tax exemptions, and a quality of life that’s hard to match elsewhere.

Another point in its favor, Dr. Al Mulla writes, which is critical for financial institutions: “The UAE has become a centre for talent attraction mainly for the Arab world, but even globally.”

london-crowds

Tourism Benefits

When the pound is low, tourism is one sector that stands to gain, and Britain is seeing tourists from across the globe.

In fact, the Financial Times reported an 18 percent uptick in foreign visitors to Britain in the month following the Brexit vote. And they’re not just travelling on the cheap. “We have noticed an increase in guests upgrading to suites, as they can get better value for their money as well as asking to pay in full in advance to lock in the exchange rates,” the Maybourne Hotel Group tells the Financial Times.

Searches for flights and hotels have increased as much as 33 percent over the same period last year. And the interest is international, coming from Canada, the US, continental Europe, Saudi Arabia and Hong Kong.

And while this may only offer cold comfort to many people, there are benefits to the British themselves when the pound is low, too. One is that when it’s too expensive to travel abroad, UK holidaymakers take staycations that pump even more money into the tourism and retail sectors.

Exporters of British goods are primed to do well too, Vanderbilt University professor Miron Woinicki points out in a piece at Vice. He says that when British goods become less expensive for foreigners to buy, British exporters, who specifically export things like “very high-end clothes and whiskey” stand to benefit.

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Concerns for the Auto Industry

Of the 1.5 million cars produced last year in Britain, more than half went to continental Europe, reports Jim Holder of What Car?, a car buyer’s guide in Britain. Unlike some exporters, automakers are not celebrating the weak pound. Instead, they’re focused on the likelihood of increased operations costs once the terms of the EU exit are known.

“Chief among the concerns of the industry,” Holder writes, “is the potential for new tariffs to be introduced, the potential higher administration costs of dealing with more individual markets and the potential restrictions on freedom of movement for workers.”

However, British consumers will probably not see car prices change for a while yet. Holder says sales projections and incentives to meet them are set until September at the earliest, and possibly to the end of the year. If the pound is still weak once these pre-arranged incentives run out, he doesn’t expect to see European car manufacturers offer new deals.

That said, Holder isn’t advising British car buyers to rush out and snap up a new car immediately. That’s because if the low interest rates continue, they’ll make financing new car purchases cheaper. Even without the incentives now being offered, the savings from lower interest rates over time might well end up as the same as a one-time discount on the original purchase price.

Pssst…Wanna Buy a Football Club?

A weaker pound will likely affect the professional football clubs because it will be harder for teams to match European salaries. “Clearly that’s potentially significant,” University of Michigan sports management professor Stefan Szymanski tells the International Business Times, “but bear in mind that we’re talking about a world where the annual revenue of the Premier League is more than double that of any other European league.”

On the flip side, foreign club owners will benefit. The salaries they pay to Premier League players will be relatively lower. And that gets to more than just saving money; it could mean a top player never before affordable suddenly is. For the same reason, it might be just the right time for an investor to realise her lifelong dream of becoming a Premier League club owner.

images by: Kaz, diego_torres, chafleks, Jonathan Wilkins

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