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Investment view

While relaxing in sunnier climes than those available to us in these rain-sodden shores the other week, I found myself reading a local English language newspaper aimed at both expatriates and tourists.

The expatriate focus was very clear. There was an article by an IFA on how those living on this particular island might invest for income and this was no offshore specialist, at least so far as I could tell. Perhaps it would be fairer to say that the name at the foot of the article was not one I recognised as being from a firm which conducted significant business in the expat market. Whatever the writer&#39s level of expertise, two points struck me about the content.

First, the income-producing asset was a commercial property fund. Nothing wrong with that but it reminded me how much emphasis is presently being placed on property investment. The whole property scene is changing dramatically as far as investors are concerned. In 18 months time, residential property will be eligible for inclusion in Sipps. With the advent of property investment funds, too, there seems bound to be an upsurge of interest in property for the foreseeable future.

The second point was that this was a sterling-based inv-estment for people who were living in the eurozone. No doubt, many of the residents of this particular far-flung outpost of the European Union still thought primarily in pounds and pence and felt more comfortable with sterling than any other investment currency. The reality, though, is that a mismatch between assets and liabilities would potentially be created.

These days, of course, the global nature of business means that many investments are likely to have some cross-border currency influences. There are plenty of constituents of the FTSE 100 index that derive by far the greater majority of their profits in currencies other than sterling. Even so, to ignore the effect of currency movements in investment planning can be a foolhardy exercise. Nowhere is this more true than in the field of borrowing.

In the past, the purchasers of UK assets funding their deals through borrowing in lower interest rate currencies have often come unstuck through the currency movement. I well recall a fashion for Swiss franc mortgages to finance UK property purchases because Swiss interest rates were a quarter of those in the UK. The amount of money lost on the currency movement far outweighed the interest saving.

When investing, the pitfalls are not as great but they exist. Retiring to sunnier climes on a sterling pension but a cost of living paid for in euros is fine as long as the relationship between the two is stable. If sterling slides against the euro, though, you could find your standard of living eroded simply because your pound buys fewer goods in your adopted country.

And the pound is sliding at present. The change in the relationship has not been great but the euro has slowly been creeping up against both sterling and the dollar. In the case of the UK, the belief that the interest rate cycle may be peaking early is principally to blame but the fear that Gordon Brown may increase borrowing to finance Government expenditure rather than for investment will also be causing concern.

Certainly, expenditure is rising faster than expected while public sector investment remains relatively muted. Not only is the prospect of higher borrowing of concern to holders of sterling, it raises the spectre of rising taxes as well.

You only have to look at the behaviour of the dollar to realise that government deficits are not good for the currency. Last week saw the US dollar slide to fresh lows against the euro. There were rumours that Asian central banks were switching out of the dollar into the single European currency, perhaps to help stave off any consequences of a Chinese revaluation but US borrowing is a concern.

This close to the American presidential election makes is hard to see what a US administration might do about its ballooning deficits but Government borrowing will be close to currency traders&#39 thinking in the months ahead.


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