Brexit concerns spook Sterling-based investors and UK expats
It’s imperative that Sterling-based investors and UK expatriates take precautions against a volatile pound as it weakens on Brexit worries.
On Monday Sterling fell by close to 1 per cent against the dollar to $1.286 and 0.2 per cent against the euro to €1.142. The drop follows mounting uncertainty as to whether the PM can gain parliamentary support for a Brexit deal ahead of the planned summit later this month in Brussels.
In addition, the fall in Sterling was impacted on Friday after transport minister Jo Johnson resigned, claiming Theresa May’s Brexit deal is “a terrible mistake” and calling for a second referendum.
As I was quoted as saying today in The Daily Express, International Investment, Fintech Finance and Verdict, amongst others, what we’re seeing at the moment is Sterling being all about Brexit. As such, as uncertainty escalates, we can expect a rollercoaster ride as deadlines loom closer and opposition increases within Mrs May’s own government.
Due to the possible outcomes being so different, nothing has as yet been priced in. This is certainly the case with come Cabinet ministers discussing the Norway option, despite the PM having rebuffed it with her red lines.
As such, Sterling is priced in a middle ground, highlighting uncertainty on which way Brexit will go, and the outcome will make a substantial difference.
Should it be discarded, or the UK gets a Norway option, Sterling could quite easily reach the $1.53 it was on the day the referendum was held, even though interest rates and growth are favouring the U.S. dollar more now than in June 2016. This is predominantly because when sentiment alters, currencies often overshoot as well as undershoot.
However, a Canada deal, or a hard Brexit, would lead to a weaker Sterling, perhaps down to around $1.20, such levels tested over the past two years when the government stressed its red lines.
A no-deal Brexit scenario, with a degree of hostility between the UK and EU, would result in an even worse growth outlook, therefore affecting Sterling further.
As such, the pound’s turbulence is, justifiably, spooking Sterling-based investors.
In addition, UK expats are also expressing their concerns regarding Sterling. Should the pound experience further falls, this would mean yet another harsh blow for people who receive British pensions, or income in Sterling, as living costs in real terms would be substantially costlier.
Therefore, in regard to investment strategy, if investors’ portfolios are already sufficiently diversified across asset classes, sectors and regions, they should hang tight. The uncertainty surrounding Brexit is too great to be able to make a strong bet on a region, asset class or even a currency.
That said, should investors not have such a diversified portfolio, but are more focused on a home bias, they should certainly take action.