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Don't bank on weak pound to lift your portfolio in 2017

Don't bank on weak pound to lift your portfolio in 2017

by Michelle McGagh Jan 11, 2017 at 11:40

Investors banking on a weak pound continuing to lift portfolios in 2017 could be disappointed, according to Tilney Bestinvest chief investment officer Gareth Lewis, who sees sterling strengthening this year on interest rate rises and an end to quantitative easing.

The pound's 18.4% fall against the dollar following the Brexit vote had a dramatic impact last year, lifting investors' holdings in overseas assets. It also boosted some domestic holdings: part of the FTSE 100's 15% rise since the vote can be attributed to the boost members received to overseas earnings, given members of the index make around three-quarters of their money abroad.

But Lewis predicted that trend would come to an end this year, despite the first few days of 2017 seeing the pound threaten to revisit 31-year lows against the dollar on fears of a 'hard' Brexit.

He predicted the Bank of England would be forced to reverse the stimulus package introduced following the EU referendum, which saw interest rates cut to 0.25% and a six-month, £60 billion government bond-buying revival of 'quantitative easing' (QE) alongside £10 billion of corporate bond purchases.

Lewis said the Bank could reverse the rate cut, adding that more quantitative easing when the current round comes to an end next month was unlikely.

‘We don’t know what Brexit will mean…so setting monetary policy on an unknown outcome is dangerous,’ he said.

Lending picks up

Lewis also pointed to an uptick in bank lending last year that proved further monetary stimulus was not needed.

‘There has already been a pick-up in UK bank lending... which has turbo-charged UK monetary expansion, suggesting the UK has a growing inflation problem requiring Bank of England action,’ he said.

‘Language has already changed to reflect the new reality. Therefore we could expect QE to end and possible a reversal of the August rate cut.’

Lewis said the increase in bank lending was important because it centred not on mortgage lending but unsecured loans, such as car loans and credit cards. This shows that the consumer spending boom in the UK which has been keeping the economy afloat is predicated on debt.

However, if this debt-fuelled spending increases inflation too much then the Bank will be forced to raise rates, making debt more expensive for those holding it.

‘If you take the bank lending out, the Bank would look through any increases in inflation and ignore it but the lending is what makes me think the Bank won’t ignore [inflation increases, leading it to] raise rates to stop the economy overheating.’

He added that central banks were ‘terrified’ of loan defaults in the face of rising rates ‘but it’s worse to let the debt go up more and more’.

‘At some point [the amount of debt held] will go wrong and it is better to have a bit of pain now [with a rate rise] rather than a lot of pain later,’ he said.

Sterling strength

As rates increase, Lewis said sterling would strengthen ‘not against the dollar but against the euro’.

‘Sterling will not be a weak currency this year,’ he said.

The election of Donald Trump as US president indicates the ‘single biggest change [for the global economy] since the banking crisis’, according to Lewis, as the focus moves from monetary policy to fiscal stimulus.

‘Capital markets became excessively reliant on QE and it has not helped the global economy because it requires stimulus that is fiscal,' he said.

In fact, Lewis said the only people to benefit from monetary policy have been those who already own assets like houses and pensions, and companies that should have failed in the financial crisis who have been kept afloat by cheap lending.

When cheap lending comes to an end, however, those companies will finally feel a delayed pinch.

‘There are lot of companies that will not be able to pay [higher interest on their debt] and the defaults that did not happen in 2008 could happen this year,’ he said.

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Comments  (7)

  • Alan Tonks: 

    “Tilney Bestinvest chief investment officer Gareth Lewis, who sees sterling strengthening this year on interest rate rises and an end to quantitative easing.”

    Tilney Bestinvest well I think that is a matter of opinion, considering what Gareth Lewis said above.

    I think they would be better taking on Mr. Bean’s Teddy as Chief Investment Officer, replacing Gareth Lewis.

    The pound will go up and down like a yoyo, whilst being manipulated to make a fortune for people in the know.

    Interest rates will not go up and quantitative easing will not end. Whilst the country has manipulating Carney as so-called Governor of the Bank of England and his Government cronies.

    18:57 on 11 January 2017

  • masud: 

    well done Alan.

    19:34 on 11 January 2017

  • Bestmate: 

    I think Alan is wrong. If the Fed increases rates say, twice more in 2017, then the good old BoE will at the very least reverse the totally unnecessary last cut to 0.25%. Our respective economies are too closely linked for this discrepancy to endure in such circumstances, and historically rates have indeed tended to follow the Fed's lead. Significant inflation is now most definitely on the horizon in the UK and without a major rebound in the pounds value against the dollar, is set to breach and stay above 2% plus. The bank will have to try to relieve pressure somehow, but is indeed between a rock and a hard place on many different levels and scenario's. Pressure will grow and a rate rise or two, this year, is not as certain a "no no" as Alan states.

    18:00 on 13 January 2017

  • Striker: 

    I wouldn't bet on the Pound rising against the Dollar anytime soon. The US economy is set for what could be massive infrastructure spending that will lead to gains in the size of their economy and subsequently the strength of the Dollar, further supported by slowly rising US interest rates. On our side of the Atlantic, interest rates will also have to rise but its going to be a very slow process because no UK government wants to preside over a property price crash in an economy large supported by house prices and debt. Brexit is also a big worry ahead. Don't sell your US equities just yet..

    09:44 on 14 January 2017

  • andy: 

    I dont think I would bet on the pound against anything in the near future.

    The reports of it now behaving like an emerging market currency bobbed around by any politicians comments on BREXIT have come true - and it just requires someone to bet either way for it to move now - either up or down - and that can then run away. Additionally, If anyone stops considering it a reserve currency it could get hammered.

    Yes as UK based investors hold Sterling - but I expect increased currency volatility - but I don't see why an investor in any other country would.

    10:46 on 14 January 2017

  • BazzaH: 

    I can see the £ going lower in March once we get started on Brexit, I can't see interests shooting up much this year, maybe 0.25%. So buy shares in companies that have foreign revenue at least until Brexit becomes clearer.

    18:57 on 14 January 2017

  • Stephen B.: 

    I think the only thing which would produce a big rise in the pound would be a definite statement that we will stay in the single market, and that doesn't look likely. Otherwise I think the comments in this article might be right for 2018 but not 2017.

    14:58 on 15 January 2017

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