There is a sugar rush, the markets are exuberant, the pound is soaring, the message is ‘buy UK’
Buy UK in the sugar rush
The pound surged within moments of the revelation of the exit poll released at 10pm last night. At US$1.34 and €1.20 euros, sterling now stands at its highest level since the 2016 EU referendum.
To put this in context, in 2015 the pound was slightly over €1.40 euros. During this period, the peak dollar price was a fraction short of $1.60 and bottomed out a few months ago at around $1.20.
I am not quite sure what to make of this. Let me re-phrase, I mean I am not sure what to make of this in the context of what politicians are saying. After the Brexit vote, the pound crashed, and the Brexit camp told us this was a good thing, as the cheaper pound will make-up for any extra tariffs the UK will pay. Now, I guess they will say the rising pound is a good thing as it shows how investors have faith in the UK. I guess the conclusion is, ‘the answer is good news, now what’s the question?’
The pound will probably rise further. This should be positive for importers and companies that focus on the UK domestic market.
Presumably, it won’t be quite so good for companies that largely trade in overseas currencies; at least it won’t be so good for their share price when measured in sterling.
For investors who changed strategy after the referendum to invest in companies that mainly trade in overseas currencies, this may suggest a reversal in approach.
Quite early this morning, I received a press release saying that the UK election result will be good for the UK property market.
'This decisive General Election result could deliver a massive adrenaline shot into the UK property market,' said Andrew Montlake, managing director of the UK-wide mortgage broker, Coreco. Top marks to the PR agency for getting the release off before 7am.
I am also reading some bullish comments about the FTSE 100, with some predicting it will pass 8,000.
There is an analogy here with the US. The S&P 500 soared in the weeks and months after Trump was elected, Johnson may even trump, Trump.
I would not be surprised if the 8,000 barrier will be passed before Christmas, if it does, Johnson will be sure to trumpet that news.
I am especially interested to see what might happen next with yields on government bonds. Will news of the election result encourage the perception of the UK as a safe haven, pushing down on yields? So far, things have been moving in the opposite direction — the yield on ten-year UK government bonds has increased slightly in the last month. In the US, where Trump has been using fiscal policy to stimulate the economy since very early on in his presidency, the yield on US ten-years rose sharply a couple of years ago on expectations of higher interest rates, before falling back this year.
Germany and Japan are the only G7 economies that see negative bond yields.
I would like to sound (and most definitely not trumpet, although there is one other version of the word trump that I have not used) a note of caution.
The UK’s current account deficit remains enormous. In a different era, politicians, the press and economists, cared deeply about the balance of payments. By past standards, the UK has one mother of a balance of payment crisis — but no one seems to care, the markets seem to be saying, ‘crisis, what crisis?’.
In the long run, however, I do expect there to be some kind of correlation between the value of the pound and the trade deficit. Sure, a trade deficit can pretty much last forever, but the sheer size of the UK deficit vexes me.
In order to mitigate against any negative economic consequences of Brexit, the Johnson regime will use fiscal policy as a kind of pain relief — Brexit ideology triumphs over the traditional conservative ideology of fiscal discipline. I think that this will have negative consequences for sterling. I expect euro parity, maybe even dollar parity, within a few years.
Unless, that is, the government seizes the opportunity created by ultra-low interest rates and borrows money to invest in infrastructure— both transport and digital — and in supporting an entrepreneurial Britain that embraces technology. A few hundred billion pounds could transform the UK, but there is a need to think big.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees