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Pound's plunge helps markets party like it's 1999

Pound's plunge helps markets party like it's 1999

by Daniel Grote Oct 07, 2016 at 13:32

The pound's heavy fall this week has delivered a further boost to investors' portfolios this week, in a year in which sterling's slide has been a major factor behind bumper returns for UK investors in overseas markets.

Even before last night's 'flash crash', the pound had been enduring a difficult week. Prime minister Theresa May's confirmation over the weekend that she would trigger the process to leave the European Union by March next year gave sterling a difficult start to the week from which it did not recover.

Traders alert to the news flowing from the Conservative party conference in Birmingham found plenty of reasons to sell the pound. If it wasn't May seemingly putting single market access at the back of the queue of her demands in the upcoming Brexit negotiations, it was chancellor Philip Hammond confirmation he would abandon predecessor George Osborne's fiscal rules, with the UK's budget deficit likely to suffer.

It all came to a head last night, when a 'flash crash' in sterling blamed on either a 'fat finger' trade or the machinations of computer algorithms saw the pound fall as low as $1.149, according to Reuters.

While it has recovered from those new 31-year lows, the pound remains 1.9% lower against the dollar today and on course for a weekly loss of more than 5%.

Our exclusive Accumulator data table, which covers the week to yesterday, shows some of the damage to the currency. Over the fives days to Thursday, the US dollar raced 2.6% higher against the pound, while the euro wasn't far behind, up 2.1%. And that's before the impact of today's plunge.

But the flipside of the pound's troubles can be seen in the sea of black encompassing our table of major global stock market returns. Only China has delivered losses for UK investors this year, with investors in all other markets enjoying returns at least in the mid teens.

Our Accumulator table shows returns in pound terms, and currency has been a huge factor in those strong performances. In the US, for example, domestic investors have seen the S&P 500 rise 5.7% this year, but UK investors have enjoyed a 25.3% return, thanks to the pound's fall against the dollar.

German investors in the DAX 30 are meanwhile sitting on a 2016 loss of 2.1%, transformed into a 17.9% gain in pound terms thanks to the euro's 19.8% rally against sterling this year. The disparity is even more pronounced in Japan, where domestic investors have lost 12.7%, but UK investors have made 20.5%.

Best returns since 1999

It means that UK investors could be on course for the best returns from global markets since 1999. The FTSE World is up 24.2% so far this year in pound terms according to our table, just a smidgen below the 24.5% return delivered in 2005. But that milestone looks like it has been passed with today's 0.6% rise in the index.

That leaves 1999's 30.1% rally at the height of the dotcom bubble as the last time global markets were this buoyant for UK investors.

Turning to the few blotches of red on our table and the pound's heavy fall hit UK government bonds, or gilts, while elsewhere, currency movements again had a big role to play. The week's rally in the dollar was bad news for gold and silver, both priced in the currency, which fell 2.2% and 7.1% respectively.

That would normally also weigh on the oil market, but Brent crude continued to bask in bullishness after the Opec cartel of oil-producing nations' agreement to cut production announced last week.

Property slumped too, coming under pressure from all angles. In the UK, real estate investment trusts fell 2.4% on fears of a hard Brexit. Hawkish noises from the Federal Reserve meanwhile did for their US peers, down 3.4%, while in the eurozone, reports the European Central Bank could start tapering quantitative easing took their toll, sending European Reits 3.2% lower.

Against this backdrop of broadly buoyant markets in pound terms, mixed asset fund managers continued to lag, as Micawber highlighted in our Forums this week. The average manager in each of the five strategies we feature is delivering returns this year well below those hit by the stock market but also lagging commodities, bonds, and even some forms of property. One to keep an eye on!

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Comments  (18)

  • Micawber: 

    It is rather extraordinary that mixed assets and absolute return funds lag so far behind the asset classes they invest in, however you make up the basket. One forum member suggested the costs of currency hedging; other possible reasons are management or trading costs or, if there was much switching, bad judgments on timing.

    Noting that sterling has declined, year to date, 16.5% against the dollar, 34.9% against the yen, and 19.8% against the much maligned euro, any whoops of joy should really be reserved for gains above those thresholds!

    14:17 on 07 October 2016

  • JohnR: 

    All that lovely price inflation still to come.

    No doubt, when it kicks in, the clueless kippers will be back to blaming it all on the EU, immigrants and those blasted foreigners, again.

    16:54 on 07 October 2016

  • andy: 

    JohnR

    Controlling immigration makes any financial pain (clearly on others) worth it - that and the £350M a week for the NHS, the removal of the 5% VAT on fuel, access to the single market (without paying for it) ... still we still havent had the emergency budget ... so both sides we not entirely honest ... but the scale of the BREXITers (UKIP / Tory / BNP) lies are orders of magnitude worse. Never mind ... we have all the gains we made to buy a lot more beer to drown our sorrows.

    17:47 on 07 October 2016

  • JohnR: 

    It is ironic I must admit.

    19:51 on 07 October 2016

  • Ivor Grouse: 

    The analysis of post-brexit thus far clearly shows that the people have chosen well having refused to listen to the garbage from the remoaners. These fickle doom mongers have been left without a paddle.

    Employment is rising, exports are up and the UK is now forcast to grow more than any other G7 country next year. The future is bright and yet these remoaners still try to pull the country down.

    10:28 on 08 October 2016

  • ICD: 

    All this joyful talk is somewhat ridiculous. There are various explanations for our stock market doing well but a better yardstick of how we are doing is the value of the Pound. We are effectively about 16% poorer as a country. A good illustration comes from easyJet. They have commented that the lower Pound has cost them £90 million because fuel is purchased in Dollars. Guess what will happen to the cost of your next holiday flight? And perhaps this scenario will happen over and over again? No of course not; brexiteers have assured us everything will be wonderful!!

    11:37 on 08 October 2016

  • ICD: 

    Ivor Grouse, you must be reading the Telegraph and not very carefully, or perhaps the Sun. If you take a peep in the FT or Economist you will realise how ridiculous your comment is. But then, what would they know about financial matters?

    11:44 on 08 October 2016

  • Mickey: 

    Not surprise that the BBC had the funds fall as a bad item yesterday but it is a surprise to see Citywire equally being so ridiculous. At least CW did say things recovered during the day whereas the BBC failed to report that the flash crash was just that and markets were in positive.

    12:16 on 08 October 2016

  • Mickey: 

    Should read - No surprise that the BBC had the pounds fall as a lead item yesterday ...

    12:17 on 08 October 2016

  • andy: 

    Mickey - that might be because its actually important and is a barometer to how well the financial markets think the economy will be.

    Now obviously there are two sides to the argument - Donald Trump says Britain will be at the top of the list when it comes to trade deals.

    I don't know which way it will go - but companies around me (I work in the IT industry) have stopped awarding contracts and are laying people off before the expected rush. They might be wrong but I didn't think it was a risk worth taking - however - other people did - because they wanted control of immigration, £350M a week extra on the NHS and the 5% removal of VAT and a far right government.

    Lets see how it goes ...

    17:55 on 08 October 2016

  • mhindo: 

    if an emerging market's currency had lost 16% of value in less than a year it would be branded too risky for investment and in full economic crisis or similar - meanwhile UK is celebrating its stock market boom …. reality is we are all poorer and it will likely get worse, fortunately I reduced most of my liquid sterling assets pre brexit, unfortunately not possible with the property which is losing value by the day….long term will need to sell and invest somewhere with a "hard" currency……..

    18:12 on 08 October 2016

  • Ivor Grouse: 

    @ICD

    Your reply reminds me of typical remoaners tactics - craftily fabricating erroneous arguments out of thin air.

    EasyJets share slide started last April in common with Lufthansa

    and Air Berlin. Surely you don't want to attribute their falls to Brexit

    as well? Easyjets problem is simply revenue per seat certainly not the the cost of fuel. Easyjet confirmed two days ago their cost per seat (including fuel) has reduced compared with last year.

    Still not convinced well Easyjet has confirmed that their fuel bill for the last 6 months is around £75M less than last year. I'm not sure which comic you read makes you think otherwise.

    Yes they will have suffered from exchange rates through the year but EasyJet also confirms that most of the exchange losses were incurred before the referendum. As for the country being 16% poorer take a look at the FT company indices - the FTSE ALL SHARE index hit a record level this week.

    Price inflation to come - yes of course - but we aren't suffering yet and you should make out we are.

    18:41 on 08 October 2016

  • ICD: 

    On the first April easyJet was 1527. On the 16th May it was 1441 On the 23rd June it was 1533. On the 27th June it was 1019

    Right now it is 896

    I suggest open-minded readers read

    http://www.bbc.co.uk/news/business-37571694

    But I actually got my information from the FT at

    https://www.ft.com/content/c2c6a85c-6436-3d8b-ae9c-6f4969dbcbee

    I suggest you contact easyJet and explain that everything will be all right.

    As you rightly say the stock market is higher than ever. That is good for me but not for the car industry and for instance Sunderland. There is unfortunately a genuine possibility that Nissan will place their next investment in the EU for reasons that are obvious to many of us.. Big international companies are making their profits in many currencies and when they convert to Pounds have higher profits to show. There are other reasons the stock markets are doing well. The yardstick of us is the Pound.

    21:43 on 08 October 2016

  • AC: 

    Investment in £ terms maybe a lot higher but overall, in international terms we are 10-15% poorer, depending on how much of wealth is directly tied to sterling. Purchasing power of our £ is diminishing.

    How long will it before price of imported good jump by at least 10%. Surely importers cannot absorb such a sharp devaluation in such a short space of time. Fuel prices, car prices, food price.

    Can we expect foreign buyers to buy even more of the prime London property.

    Will the lower pound make is less attractive for economic migrants to come to UK. After all, their earning when converted to Euro will be over 10% lower now. Where is the tipping point ?

    At what point will BoE change their stance and think about propping up the pound ?

    23:52 on 08 October 2016

  • andy: 

    AC

    Remember that everyone told the country (with the exception of the hard right (UKIP / Tory hardliners), Donald Trump, Marine Le Pen and Putin) that they would be poorer under BREXIT. So why are we surprised?

    I just notice that the people who voted out now holding their hands out demanding that London give them the money that they used to get from Brussels even though they voted to be poorer. Cornwall - who voted out in a big way has had its hand out ever since.

    http://www.independent.co.uk/voices/brexit-cornwall-brussels-office-eu-funding-kept-up-with-britain-a7168491.html

    08:09 on 09 October 2016

  • ICD: 

    AC, I think you are right about immigrants. During my campaigning, (for remain of course) we said to each other flippantly that the Brexit folk might succeed in getting rid of the nice immigrants from the EU by rubbishing the economy, not intending that as a serious comment. However now that the Pound buys far fewer Euros there will be less incentive to come here. Additionally, living in the SE of England it is my subjective opinion that they were even more of a benefit to us than economists think. It is more than just adding up what immigrants earn, pay in tax, cost in other ways. Their presence meant small businesses could exist and often feed other businesses. It is all interconnected.

    09:16 on 09 October 2016

  • Andrew Stevenson: 

    Huge budget deficit (with May/and the guy with stubble) promising to make it much bigger. Huge trade deficit, and Carney promising to put interest rates down and print billions more. What sane person wouldn't dump sterling ?

    11:10 on 10 October 2016

  • Ivor Grouse: 

    Don't you worry everything will be all right on the night.

    All this false reporting and dunderhead garbage is getting to me.

    The only thing that will cost more is European holidays.

    If the stock market continues like it is we will all be cruising anyway.

    Everything else mentioned by the dunderheads is questionable.

    P.S. Lufthansa down 30% since Brexit.... don't worry, markets do that.

    If I was paid in Euros I'd be buying ££ by the bucket load.

    What sane person wouldn't.

    22:28 on 10 October 2016

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