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Thoughts on the British Pound

By Gareth Horsfall - Topics: Currencies, Euro, sterling
This article is published on: 18th October 2017

18.10.17

Using long term macroeconomic data, sterling looks to be significantly undervalued versus the euro (see graph). Without Brexit, we could be looking at, what we call, an ‘equilibrium’ value of around 1.50 euros to the pound, taking into account economic fundamentals only (relative prices, relative productivity and relative expected savings).

Assuming Brexit, we’re working on the basis of circa €1.3 to £1 – but it could take a number of years to get there!

Productivity is a key driver of our data used in this calculation – particularly productivity in the tradable goods sectors. This is likely to suffer after Brexit due to non-tariff barriers to trade (think complying with overseas regulation and customs regimes). That said productivity growth in Europe has been weak, and is unlikely to surge ahead while the UK economy recalibrates, somewhat limiting the damage to the equilibrium rate. If the European project revives around a new Macron/Merkel nexus, then further gains from integration may lower the equilibrium rate a little further via improving Eurozone productivity.

Although the long-run economic value of the pound would shift lower in a ‘hard Brexit’ scenario (i.e. no special deal), primarily due to the impact on productivity, the actual exchange rate is so far below the economic equilibrium value that we expect the pound to rise on a long-term basis in any scenario. It is really just a question of speed.

Unfortunately, such long-term analysis does not help us forecast currencies on a 6-12 month view, and the newspaper headlines generated by ongoing Brexit negotiations could well drive exchange rate volatility.

Until June, the EUR/GBP exchange rate over the last couple of years has closely tracked changes in relative interest rate expectations (i.e. what the market thinks interest rates will be in Europe in 3 years’ time relative to what they think they will be in the UK). This lends some shorter-term support to the pound, and indeed could favour sterling further if the run of strong data in the Eurozone starts to decline.

Currencies Direct

CURRENCIES DIRECT
You may be aware that at The Spectrum IFA Group we refer our clients to Currencies Direct in the UK for foreign exchange transactions.

I had a recent conversation with them about the number of new entrants into their market space and the availability of competitor firms and how it was affecting their business model. However, they informed me that they have some of the most competitive foreign exchange rates on the market, because of their size, and they are happy to discuss beating rates offered by existing long terms providers and also the newer online only entrants into this market place.

If you are making transfers through an existing service or want/need to start then let me know on gareth.horsfall@spectrum-ifa.com and I can introduce you to their representatives to discuss their competitive rates.

As my grandma used to say to me:

“IF YOU LOOK AFTER THE PENNIES THE POUNDS WILL LOOK AFTER THEMSELVES”

Currency Fluctuations

By Gareth Horsfall - Topics: Currencies, currency fluctuations, Italy, sterling
This article is published on: 17th October 2017

17.10.17

This week I want to dedicate my Ezine to the currency of living abroad.

How many people do you know in your home town or in your home country that worry about currency fluctuations? Have you ever heard anyone worry about the EUR v GBP or EUR v USD level at any one time? Maybe they look once a year when they are going on holiday and leave the post office with a smile on their face or have a sullen expression depending on the exchange rate. But for the rest of the year?

It’s not so simple for the life of the straniera/o!

Almost everyone I know is concerned to some extent about the exchange rate. Whether it is someone who is building a house and watches the exchange rate drop (you know who you are!) or people living on fixed pension incomes. I also include myself in the exchange rate trap since part of my earnings are in GBP. I understand your pain.

Of course, these are the simple aspects of currency re/devaluation and to some extent we can budget and plan for its eventuality and prepare ourselves. But what about when multiple currencies are at play in our investment portfolios. There it can create even more unusual effects.

The following comments (slightly modified by myself for easier understanding) come from Robert Walker at Rathbones Asset managers who wrote a piece about the interplay of currencies in a managed portfolio of assets. I thought it might interest you.

CURRENCIES AT WORK
With a portfolio approach that is global in nature, currency volatility is playing an important role in the reported returns to clients on a quarter-by-quarter basis. The last two years have seen substantial US dollar, British Pound and Euro volatility as confidence in the respective economic regions ebbs and flows. This has a profound effect on how the overseas assets’ performance are reported in the investor’s base currency, based on their individual circumstances.

US DOLLAR
The US dollar has been a safe haven in times of increased economic uncertainty. In the first few months of Donald Trump’s presidency, the US dollar strengthened on the presumption that tax cuts would stimulate the economy. This has subsequently reversed, as the realisation of many false or premature promises has taken hold.

BRITISH POUND
The British pound has seen its value fall significantly against the US dollar and euro due to Brexit uncertainty. Until the exact path of Brexit and the economic ramifications of this are known, it is likely that the pound will remain weak. There will be many twists and turns along the way until March 2019, not least with the Conservative’s General Election result and subsequent reliance on the Democratic Unionist Party. The current status quo is very vulnerable to further turmoil and the weakness of sterling is a by-product of this.

EURO
At the turn of 2017, markets were focussing on the possibility of anti-establishment vote in both The Netherlands and France. At the time, both countries had parties with anti-European Union policies in opinion poll ascendency and thus the consensus was to remain underweight in the Eurozone. Since that time, the euro has undergone a substantial recovery of over 14% against the US dollar as political risk subsided and economic confidence in the Eurozone improved. Against sterling, it is up over 7% this year in addition to the weakness after Brexit of 2016. Both of these currency movements have had the impact of weakening the value of US and UK assets for euro investors.

THE INTERPLAY OF CURRENCIES
Performance of globally diversified portfolios has been affected by each of these currency movements. For example, had a US investor bought euro assets at the start of 2017 the translated value would be increased by 14% due to the currency effect alone, but a euro investor who bought US assets at the start of the year would be seeing a translated loss of over 12%. Investors in sterling will have seen the value of overseas assets increase markedly during the Brexit process as the pound has weakened significantly, but euro investors with sterling exposure have seen a corresponding fall.

Over the long-term, we would expect the impact of shorter term currency movements to average out. For the pound particularly. (See comments about the Pound in the right hand column).

When managing portfolios in euros, sterling and US dollars, we ordinarily have a degree of country of residence bias to a client’s base currency. However, this is dependent on a client’s unique circumstances. Our portfolios are globally diversified, where we are trying to gain exposure to a portfolio of high-quality global assets in order to reduce risk to any one particular economic region. Indeed, currency analysis can be somewhat circular, as the underlying investments in each region are typically multi-nationals that have a global spread of currencies. This can mean that an individual portfolio may deviate against a certain measure or benchmark over the short-term, but which is most likely a temporary effect, but we feel that the spread of global investments will reward clients well over time, rather than focusing on fast changing and unpredictable currency movements.

HEDGING
Almost all investment professionals admit that forecasting future direction of currencies is a thankless task, as currencies are largely influenced by future unknown events which are, by definition, unpredictable.

As with most investments, volatility can also be driven by speculative investors such as hedge funds. Hedging currency risk, i.e. eliminating the currency impact on returns and focussing on the underlying return, is sometimes considered by investors. This can add to certainty but also more cost. In many cases, due to the inherent unpredictability of currency markets, hedging not only detracts from returns, due to the increased costs, but often proves to be the wrong action in hindsight.

If you want to review your portfolio returns over the last year/s with an eye on the impact of currency fluctuations and how this might affect your income and expected returns then you can contact me on gareth.horsfall@spectrum-ifa.com or call me on 3336492356

Investing in turbulent times

By Sue Regan - Topics: BREXIT, Elections, sterling, Uncategorised
This article is published on: 12th January 2017

12.01.17

In the words of Bob Dylan….The Times They Are a-Changin’

Well, 2016 certainly saw its fair share of change on a global scale, both politically and economically. A few notable events in the year’s calendar being:

  • A slump in Chinese economic growth and heavy selling-off of stock causing its stock market to close for 3 days in January and wider global market turbulence
  • The oil price crash early in the year which, although a welcome bonus at the petrol pumps, had a largely negative effect on the global economy which now relies far more on emerging economies that are oil and commodity rich than it did 15 or 25 years ago – the last periods of ultra low oil prices
  • Interest rates are at an all time low and could go even lower, even though inflation is on the up. Whilst this is a good thing if you are a borrower, it’s not good news for savers
  • BREXIT – as well as the political chaos left in its wake the vote to leave the EU sent sterling into a downward spiral taking it to its lowest level against the US dollar in over 30 years. Although the UK stock market rallied initially because UK exports looked cheap, and the fall of the pound against the Euro has been a little softer, it has dramatically reduced the income for anyone transferring their pensions from sterling to euros
  • Donald Trump’s victory in the US presidential election took most by surprise, but the president-elect continues to defy expectations. Contrary to the predictions of many experts, stock markets have rallied strongly since his victory, with the three major US indices reaching record highs while the dollar has soared. What effect this will have on the longer term outlook for the US and the rest of the world is yet to be seen but a hike in US interest rates now seems very likely

Sometimes change is positive and sometimes it is negative. When things appear to be bad it is often tempting to allow emotion to intervene and bad investment decisions can be made. To say that the future is uncertain is an understatement, but when is the future ever certain? As the old adage goes “the only things certain in life are death and taxes”. During times of increased uncertainty, it feels “safe” to leave your hard earned cash to sit in a bank account where it won’t be affected by market falls and “at least it will earn a bit of interest” – and that is very often the case BUT that isn’t to say that it won’t lose any value. With interest rates at an all time low and inflation on the rise you don’t need to be a mathematician to work out that if the rate of inflation is higher than the rate of interest your cash is earning then the real value of your capital is falling, not to mention the Income tax payable on savings interest. The thing most investors want above all else is to grow their capital.

Market timing is difficult at best – even the professionals can get it wrong. Every market cycle has days when it rises and days when it falls, known as market volatility. The herd instinct as well as our emotions can sometimes lead us to buy when markets are on the rise or, as is often the case, when they are at a peak, and sell when they are low. Often a few good days account for a large part of the total return on an investment but trying to predict when these days will be is virtually impossible. By staying in the market you ensure that your investments will benefit from the good days.

The key to reducing market volatility is diversification. Although it does not guarantee against loss, diversification is the most important component to achieving your long-term financial goals whilst minimising risk. A well diversified portfolio will include investments across a broad range of asset classes (e.g. cash, bonds, property and equities) and investing in several different industries; sectors; geographical regions; and incorporating different fund managers.

Good portfolio managers will monitor and analyse closely the changes and trends going on in all aspects of the investment universe and will find opportunities even when things are generally perceived to be “bad”. Choosing the right fund manager(s) to manage your money is crucial. Although The Spectrum IFA Group is completely independent and is free to recommend any and all investment providers out there – we don’t. We place huge importance on our rigorous selection process before adding a fund to our Preferred Funds List, considering such things as the strength and security of the fund house; its regulatory environment; the experience and track record of the fund manager(s); the team and resources available; the investment process and the fund mandate. After undertaking the detailed selection process our specialist Investment Committee put together a comprehensive list of funds and investments to suit different risk profiles, time horizons and financial objectives.

Financial Review

It is at times like this that people need financial advice more than ever. If you would like to have a confidential discussion about your situation, or any other aspect of retirement or inheritance planning, you can contact me by e-mail at sue.regan@spectrum-ifa.com or by telephone on 04 67 24 90 95 to make an appointment. We adopt a highly-personalised approach to expat financial planning. We are here for the long term, and will continue to guide you through all types of financial issues. The Spectrum IFA Group advisers do not charge any fees directly to clients for their time or for advice given, as can be seen from our Client Charter at www.spectrum-ifa.com/spectrum-ifa-client-charter/

Brexit, US Election & Exchange Rates

By Daphne Foulkes - Topics: BREXIT, Currencies, France, sterling, Uncategorised
This article is published on: 7th November 2016

07.11.16

There are so many things that I could write about this month and it’s difficult to choose one above the others. So a quick summary of what’s topical might help.

BREXIT

What an interesting conundrum that the UK government is faced with now! Actually not just the government, but the MPs who personally wanted to remain in – or leave – the EU, before the Referendum took place, but represent constituencies that voted in a different way to those MPs personally want.

Will MPs put their personal feeling aside and vote according to what their constituents want? Would this effectively change the result of the Referendum. At the very least, MPs should ensure that their constituents are provided with sufficient information on all of the issues that can arise if the UK leaves the EU. Constituents can then make an informed decision, if given the opportunity to express their opinion to their MP.

It’s interesting that the Court’s decision was based on the argument that the government cannot use executive powers to trigger Article 50 of the Lisbon Treaty because it would effectively mean overturning an act of Parliament. However, Parliament is sovereign – it can create laws and only Parliament can take these away, not the government. The interesting word here is “sovereign” because this is exactly what the Brexitiers want to get back from the EU.

It’s well known that Theresa May still wants to push forward with triggering Article 50 by the end of March 2017. However, unless the government wins its appeal against the Court’s decision, she may not get her wish.

Despite the ‘certainty’ in law of the Court’s decision, the result creates more uncertainty at this point, as to whether or not Article 50 will ever be invoked. This is likely to continue to create pressure on Sterling (more on this below), and market volatility, until such time as when the process has either been completed or dropped altogether.

On the bright side, if MPs are to debate the terms of what the UK should negotiate from its withdrawal from the EU, before Article 50 is invoked, perhaps we may have some idea of what the outcome of a Brexit may look like. However, it’s a ‘catch 22 situation’, as the EU will not negotiate terms with the UK until Article 50 is invoked and so there is no guarantee that the UK will get what it wants – whatever the outcome of the Parliamentary debates.

So Brexit may not now mean Brexit, but at the very least, it may be further away than we thought.

US Presidential Election

I am writing this article a few days before the election. It seems that both candidates may have skeletons in their closet – Clinton with her emails and Trump with his tax returns. During the last few days, Trump went ahead in the polls and now Clinton has pipped ahead again. In reality, the polls are too close to call and the last time that I wrote that was just before the EU Referendum. Look what happened there!

Markets are beginning to price in the possibility of a Trump win. If it becomes a reality, there is likely to be a large sell-off in US equities (and it can’t be ruled out that this may ripple through to other markets). This is contrary to what would usually happen after a Republican victory, but then, Trump has contrarian views to those of the normal Republican policies.

However, as markets begin to reflect on positive tax changes and the looser regulatory environment that Trump supports, we might see a V-shaped turn, perhaps a repeat of what happened after the Brexit vote.

If the odds continue to move against Clinton in the final days approaching the election, the markets are likely to move further downwards. However, if the outcome is a Clinton win, then it could bring with it a bounce back in markets.

Longer-term market views of a Clinton win are positive, but not so for a Trump win. There is a high possibility that his anti-trade policies with the rest of the world would cause a large slowdown in growth. Unlike the UK that wishes to close its borders to immigrants, but still wants to trade with the world, Trump seems to be determined to curtail imports through a variety of policies, all of which are within the power of a president, with or without the support of Congress. As a result, a Trump trade-led recession could even tip Europe back into full-blown recession, which would likely precipitate a serious European banking crisis, something which is already a concern. Additionally, the effect on emerging markets could be very negative.

By the time you read this article, we may know the results, or will do shortly after. In the meantime, I am very much hoping that the American people do the right thing on the day.

Sterling Exchange Rate

Can it get worse? Well yes, it can and yes, I think it will. I would not be surprised to see Sterling reach parity with the Euro and lately, I have started to think that it could go even lower. Unfortunately, the downward pressure on Sterling is likely to continue until Brexit is over

If you are retired and receiving UK pensions, then you will be feeling the difference. Even with the little bounce back after the Court’s decision, Sterling has still fallen around 16% since the day following the EU Referendum and around 25% over the last year – so in other words, that’s 25% reduction in your pension income. If you also have investment income in Sterling, this means that your capital has to earn 25% more than it did a year ago, just to maintain the same rate of return relative to Euro. Even worse, your Sterling capital has lost 25% of its value in Euro terms.

Sterling is undervalued and there is no doubt that it will eventually rise from the ashes. But when and what do people do in the meantime?

If you are using a bank to transfer Sterling to Euros, you are likely to be receiving a very poor rate of exchange. Hence, it is worth looking at using a forex company for your currency transfers, as the exchange rate that the companies offer is usually higher than the banks. If you do not already have an account with a forex company and you would like to know more about this, please contact me. Even if you already have an account, it can be worth shopping around and we can refer you to a reputable company.

If you are lucky enough to have some capital in Euros already, it might be worthwhile using this, in lieu of your normal Sterling source of income, or at least for part of your income needs. However, everyone’s situation is different and so it is very important to take advice before doing this to make sure that your longer-term objectives are not put at risk.

Financial Review

It is at times like this that people need financial advice, more than ever. Hence, if you would like to have a confidential discussion about your situation, or any other aspect of retirement or inheritance planning, you can contact me by e-mail at daphne.foulkes@spectrum-ifa.com or by telephone on 04 68 20 30 17 to make an appointment. Alternatively, if you are in Limoux, call by our office at 2 Place du Général Leclerc, 11300 Limoux, to see if an adviser is available immediately for an initial discussion.

The above outline is provided for information purposes only and does not constitute advice or a recommendation from The Spectrum IFA Group to take any particular action on the subject of pensions, investment of financial assets or on the mitigation of taxes.

The Spectrum IFA Group advisers do not charge any fees directly to clients for their time or for advice given, as can be seen from our Client Charter.