In 1982, Paul McCartney released an LP with the song “The pound is sinking”. At that time, the British pound fell sharply against other currencies. Historically, Sterling was expensive, and this was an advantage to people travelling abroad or to companies that were importing goods and services from other countries.
This trend changed following the Brexit referendum. After the result, the markets became very nervous, and investors reacted. This resulted in the pound falling 15% against the US dollar and a 13% against the Euro.
USD / GBP year-to-date
EUR / GBP year-to-date
British tourists have already felt the loss of purchasing power when travelling abroad, and companies are also paying more for their imports. There are also other consequences like inflation, as British companies pay more for their foreign goods they would have to increase their prices to maintain their current returns. In the end, it will be the British consumer that “picks up the tab” for the weaker pound.
Over last three months, inflation has been at it’s highest in the last year: 0.5% in June; 0.6% in July and 0.6% in August. The figures are not especially high, but materials and fuels bought by UK manufacturers rose by 7.6% in price. British companies may resist increasing their prices resulting in fewer benefits, but if the cheap pound persists, an increase in their prices would be the likely outcome which would, in turn, have an impact on every household’s budget.
Should inflation increase and interest rates remain at their current low levels, (link to post), investors may decide to move their funds from more conservative investments like the money market with low returns to more risky investments like equities.
On the flip side, British products/ services will become cheaper and more attractive for other countries and tourists will enjoy cheaper prices when visiting.
Whether the positives will outweigh the negatives – only time will tell. What we do know is that that households encounter new situations constantly. One thing is for sure, it will be interesting to follow the individual investor reaction should prices increase and returns become negative. Will they invest in riskier products, as the economic rationality dictates?