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Sterling considerations

Maltese investors currently have a dilemma when mulling over British sterling investments.

While it is true that the pound has rarely seen such weak levels, the last time the pound traded at similar levels was in 2010, there is no guarantee that the direction will change anytime in the near future.

Thus while investors in UK equities have gained 6.9 per cent since June, they have also lost 7.3 per cent due to currency movements relative to euro holders.

Indications of a hard divorce with the EU continue to weigh on the UK's economic potential and long term outlook. Deciding whether it is an opportunity to buy or the last chance to run away has never been harder.

Currency forecasts
Sentiment is starting to recover slightly but remains near post-Brexit lows.

Uncertainty about the UK economy's future relationship with the EU may weigh on the currency further. The British Prime Minister's strategy appears to put migration limits ahead of access to the single market. Both are detrimental to the UK's economic potential.

This gloomy outlook appears to already be discounted in the exchange rate. Technical levels indicate a trading range between 0.87 and 0.91 against the euro. Near-term a moderate rally is possible. The risk is a broader loss of confidence in the UK if negotiations with the EU turn into a squabble.

From a technical perspective the chance of a rally is much higher than a chance of further currency deterioration. However, data is significantly biased by the massive movement observed recently.

Determinants of direction
Without any doubt difficulties in negotiating Brexit will have the most impact on the sterling. The full impact probably still needs to be priced in.

Until now data has mostly surprised to the upside since the referendum. Economic data is expected to deteriorate in 2017 as investment slows down weighing negatively on the currency.

A possibly expansionary fiscal and monetary policy stance to support economic activity would put further pressure on the currency.

A possible rate hike in the US and eventually QE tapering by the ECB would raise the relative value of the dollar and the euro. These will contribute to further downside in the sterling.

Base currency considerations
A huge determining influencing investment decisions, in this case, is the individual's long-term intentions on the currency. Those that have a time horizon on their investments need to monitor closely current events, as the economic implications from the political maneuvering will be substantial.

Holders of sterling investments or cash that have already decided to remain invested in the currency for the long-term, need to bother less about the exchange rate movements. Equity holders are expected to be the winners exchange considerations will have a significant impact on the bottom line.

This article was issued by Antoine Briffa, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

 

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