More than just a blip, the pound’s recent slide could signal the start of a prolonged period of weaker sterling, according to Adviser Fund Index panellists.
Last week, sterling flirted with six-month lows against the euro and dropped to its lowest point against the dollar since May. The precipitous falls have been read by some as symbolising a shift in focus towards a longer-term outlook for the currency.
“Fundamental news has re-asserted itself and weakened the pound,” UBS currency strategist Gareth Berry said in a report last week.
The fear is that negative views on the currency could affect Britain’s ability to keep pace with the global economic recovery, compounding liquidity problems by making the UK appear unattractive for investors.
Last week’s Consumer Price Index figures fell to an annual rate of 1.1 per cent in September, its lowest rate since September 2004.
“These latest inflation numbers illustrate that in spite of recent signs of recovery, deflationary forces are still at work in the UK economy,” says Schroders chief economist Keith Wade.
The figures have compounded concerns over Britain’s fiscal position and the potential impact of quantitative easing on the gilt market.
“We are moving into a period of weaker sterling,” says Chartwell investment research manager James Davies. “My concern is for Government bonds. With a hugely indebted Government, sterling will suffer and gilt yields will rise. We will be looking to move out of them at the next rebalancing.”
With the market still sensitive to negative macro news, a move into large-cap stocks is being suggested by many market commentators.
“That appears to be a fairly prevalent theme among fund managers we have been speaking to, especially in the equity income space,” says Whitechurch Securities head of research Ben Willis. “Managers are profit-taking from the cyclical story and increasingly are looking towards companies with overseas earnings.”
AFI panellists point to the commercial property sector as one that stands to do well as foreign investors eye the cheap pound as an opportunity to buy assets at historically low prices.
“Ironically, commercial property will gain from a weak pound,” says Willis. “Demand is driven by the weakness of sterling as overseas investors will start seeing opportunities. They are likely to focus on London but should spread elsewhere in the country as well.”
According to the latest statistics released by the Investment Management Association, net inflows into commercial property funds touched £129m in August. The figure rose some £34m from July to reach its highest level since June 2007.
“The area we are looking at playing a weak sterling is property,” says Davies. “There are opportunities presenting themselves but we are as yet undecided on the best way to go.”
Despite potentially worrying macro signals, that people are still happy to remain invested will give some confidence the market can avoid the sharp falls of last year.