Share Prices & Company Research


22 November 2019

Sterling’s Stellar Run

The Eurozone has faced a torrid time of late with subdued inflation and growth prospects remaining stubbornly below potential. The latest inflation report for October saw core inflation figures revised down to 1.07%. There are some signs of upward trending inflation in the services sector, however, Germany’s core inflation remains below the overall Eurozone, dragging the statistic down. With little sign of upward pressure, it is difficult to see why the European Central Bank (ECB) shows no sign of urgency to reinforce the September package with further easing.
Germany narrowly avoided recessionary status as its GDP growth was revised up marginally due to favourable weather and front-loaded exports ahead of the original date providing stimulus for first-quarter of 2019, though weighing on the second quarter. The recent stagnation is consistent with recent business surveys and coupled with contracting IP which has persisted since the middle of last year. Germany has managed to scrape by so far, but a reduction in industry and downward pressure on the automotive industry present a significant risk to the broader economy. There is little sign from the ECB that they will announce additional easing and given it often takes time for them to build consensus, it may be the new year before we see a material change – unless, of course, we see a sharp fall in PMIs for the area or an announcement of a US tariff on Eurozone cars.

Disappointing data is not confined to the Eurozone; the United States has seen signs of weakening consumer sentiment and an increase in staff being laid off, potentially indicating the economy could be beginning to slow. Manufacturing has faced headwinds, particularly with the United Automobile Workers strike rumbling on for nearly a month. Sterling is on a stellar run as it heads into the uncertainty of a UK general election. The Pound is trading around US$1.29, levels not seen since the first quarter of 2019. Given that the risk of a disorderly no-deal exit from the EU has retreated, the Pound has had a material uplift. The upcoming 12th December election will provide further clarity on the direction of Sterling; if we see a Conservative majority, we could see even further legs, as a clear path would be set over Brexit to end the prolonged period of uncertainty. A Labour victory could boost Sterling, as their plans to raise public spending could raise aggregate demand as the extra spending would cause the Bank of England to raise interest rates to curb inflation. A loose fiscal policy coupled with tighter monetary policy in economic models leads to a stronger currency. Furthermore, given that Sterling is close to its lowest level since 1985 against the Dollar, and an eight-year low against the Euro, a low real exchange rate can lead to rises in nominal exchange rates. Putting theory aside, a Labour government could lead to increased levels of risk and uncertainty to the economy, which could in turn deter investors and act as a downward pressure on the currency.
Whichever way Sterling goes, investors should consider currency movements when constructing their portfolio. A strong Pound will benefit UK domestic companies, mostly Mid-Cap 250 listed companies. In contrast, a strong Pound hurts companies with large overseas revenues as their earnings are worth less, therefore, we would expect companies in the UK’s blue-chip index to take a hit.
Elizabeth Pindar | Investment Executive
Sterling’s Stellar Run
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