03 September 2019

'The pound is now as volatile as the stock market, a very unusual state of affairs for a developed economy'

4 min read

Trevor Greetham
Trevor Greetham

Head of Multi-Asset at Royal London


Commenting on current political  uncertainty, Trevor Greetham, head of multi asset at Royal London Asset Management, said:

“Political uncertainty is rife as we approach the scheduled 31 October deadline for the UK to leave the EU and this is creating significant currency risks that UK-based investors need to take into account. The pound’s volatility on the foreign exchange markets has surged to a level only once exceeded since the 2016 referendum. The exchange rate is now about as volatile as the stock market, a very unusual state of affairs for a developed economy.”

“In most political crises around the world it’s the stock market that reflects moments of stress, dropping sharply when investors lose confidence in the outlook for the domestic economy and bouncing back when policy makers respond to the market panic with corrective action. The UK stock market fails to provide this useful function for historical reasons: around 70% of UK company revenues come from overseas.”

“As a result, it’s the pound that’s taking the strain with the Brexit crisis and very large swings are possible because politicians don’t feel the same urgency to respond to its movements. The pound is down 15% against the euro since the 2016 referendum and nearly 20% against the US dollar.”

“There’s a lot for sterling to contend with this week after the government announced a long prorogation of parliament, opposing MPs drafted legislation to extend the Article 50 timetable and Prime Minister Boris Johnson suggested he’d rather call a snap General Election ahead of the EU summit on 17/18 October.”

“The markets would be forced to factor in No Deal Brexit if a snap general election  returned a majority Conservative government insistent on leaving on 31 October. The pound would probably rally on developments that increased the prospects for a negotiated exit deal, or another referendum with remaining in the EU as an option, but it’s not obvious that a majority Labour government would be greeted positively given other market-unfriendly policies. Counter-intuitively, a hung parliament requiring the support of centre parties might be the best outcome for the pound.”

Against this backdrop, it’s almost impossible to make forecasts but there are things investors can do to manage sterling volatility:

1.       Those with a lower appetite for risk can invest a larger proportion of their assets in domestic bonds and cash, assets unlikely to be impacted significantly by swings in the pound.

2.      Those seeking higher growth can consider including both global equities and UK commercial property in their portfolios. A No Deal scenario would be a shock for the property market but equity prices would probably rise as a weaker pound inflated overseas earnings. Vice versa, in a more positive scenario for the pound returns from equities would be lower but we’d expect surveyors to mark up domestic property prices.

3.      Investors can seek out funds that approach the currency markets more tactically. We have been shifting away from sterling in our multi asset funds since Theresa May resigned as prime minister as we judged the risk of No Deal would rise under Boris Johnson. We are monitoring events closely in case of developments that could lead to a short term bounce in the currency but we remain cautious on the outlook.”

About Royal London Asset Management (RLAM):

Established in 1988, Royal London Asset Management (RLAM) is one of the UK's leading fund management companies, providing investment management solutions to both wholesale and institutional clients such as not-for-profit organisations, local authorities and the insurance sector.

RLAM manages £148 billion of assets and employs 121 investment professionals as at 31 December 2020. It invests in all major asset classes including UK and overseas equities, government bonds, investment grade and high yield corporate bonds, property and cash.

For professional clients only, not suitable for retail investors.

Issued by Royal London Asset Management Limited, registered in England and Wales number 2244297; authorised and regulated by the Financial Conduct Authority. Registered Office: 55 Gracechurch Street, London, EC3V 0RL.

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