Theresa May informed the other 27 member states of the UK’s intention to quit the European Union, we now have two years to negotiate the terms of this hugely complex divorce.
How this will play out no one really knows - no country has ever left the EU before. There are many points of difference between the two sides, Britain wants to get on with the trade talks; Europe wants to settle the financial cost of Britain’s departure before moving onto anything more substantial - that bill might be as much as £50bn. And we haven’t even got to the negotiating table yet.
But now that Brexit has begun, the time for political posturing is over. Investors and savers are understandably concerned and want answers to practical questions.
A key issue for many is the future direction of the pound, given its impact on savings, investments and our day-to-day living costs. Sterling tends to bear the brunt of worries about the UK economy – in the wake of the EU referendum, the currency suffered painful falls. Remember that tweet the morning after the referendum results were published? “Good morning Britain, this is what happened to your currency while you were sleeping” accompanied by a painful looking graph showing the dramatic slump.
In October last year, a so-called ‘flash crash’ saw the UK currency fall by 6% in a couple of minutes, with poor liquidity and pre-programmed computers blamed for the temporary havoc caused.
This week, sterling has sent mixed signals, hitting a seven-week high against the dollar on Monday, only to come under pressure today against most major currencies. While the pound is clearly vulnerable to the future direction of Brexit negotiations, it hasn’t been helped by the dollar roaring back to life and the prospect of a second Scottish referendum.
As it stands, there are two schools of thoughts on the future direction of sterling. The first is that the pound can brush off any Article 50-induced weakness and is largely range bound, unlikely to fall much further. Some even argue that the risks are skewed to the upside for sterling, highlighting that while political risk may dominate the headlines, currencies are driven by more mundane factors. If the UK starts to tighten its ultra-loose monetary policy given improving employment data and rapidly rising inflation, this could see the pound strengthen.
Others argue that the pound is likely to suffer further weakness as it cannot escape getting caught in the difficult and torturous negotiations which lie ahead. Of course a falling pound may not necessarily be a bad thing - sterling weakness makes UK goods more competitive overseas and our assets more affordable. Here the clearest winners are overseas tourists and investors. Other likely gainers could be anyone with UK-denominated assets to sell – owners of the kinds of properties that appeal to foreign buyers, for example. UK commercial property, with its already attractive income yield, looks more compelling to buyers with dollars and euros in their pockets.
The FTSE 100 is another beneficiary of a falling pound. A weaker sterling makes our goods and services more competitive and British companies’ overseas earnings more valuable on translation back into pounds.
But there are question marks over how long the currency effect can prevail if Brexit means a slowdown in the broader economy. A weaker pound also pushes up import costs making goods and services more expensive - we’re already seeing this reflected in the latest inflation figures. Last month inflation passed the Bank of England’s 2% target with a reading of 2.3%. This of course reduces real consumer purchasing power - bad news for an economy which relies on consumer spending.
Rising prices off the back of a weaker pound also has implications for our savings and investments as inflation erodes the spending power of future interest and dividend payments and eats away at the worth of your original capital.
No-one can say with much certainty where the currency will head from here but with a meaningful rally looking highly unlikely, it does seem prudent to position a portfolio for an extended period of sterling weakness. The best defence against uncertainty is to make sure that your savings and investments are as well-diversified as possible. For the astute investor, uncertainty can also mean opportunity by tapping into compelling investments at lower prices.
Arguably the best mantra for any investor or saver now is the one which popular culture has rendered into a British character trait: Keep calm and carry on.
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Maike Currie is an investment director at Fidelity International and the author of The Search for Income – an investor’s guide to income-paying investments. She acts as a spokesperson and commentator on investments and consumer finance with a special focus on income, interest rates and inflation. Prior to joining Fidelity, Maike worked as a financial journalist across a number of titles in the Financial Times Group. She continues to write a regular column for the FT.
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The value of investments and the income from them can go down as well as up, so you may not get back what you invest. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.