Buying Sterling
May 4th 2012, 8:22 am
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Buying Sterling
There has never been a better time to buy sterling. It is within 7% of its lowest level since the Bank of England initiated its current trade-weighted index in 1980. It is 34% cheaper than it was in the early 1980s. In the last five years the pound has become 27% more affordable. This is bad news for people in the UK making international investments but makes investing in the UK from overseas a very attractive proposition.
It took investors a while to realise the significance of this buying opportunity. For most of the last five years they were content to stick to the traditional safe havens - the yen, the dollar, the euro and the franc. That is no longer the case. In the past 12 months the smart money has been moving gently into sterling. The flow has seldom been obvious and the moves never spectacular but the pound has quietly moved ahead. Those who got in on the ground floor in July 2011 are already looking at profits of 5% or more.
That does not mean there is nothing left in the pot. Far from it. From a technical perspective sterling is well-placed to double that gain in the next 12 months. Just look at the opposition: Japan's national debt is huge, more than double its annual gross domestic product, and the government is making no effort to reduce it. America owes more than it can produce in a year and is still printing money. The euro is fighting for its survival, with Spain lined up to join Portugal, Greece and Ireland in the bankruptcy basket. Switzerland's currency is shackled to the euro by the Swiss National Bank's determination to prevent it getting stronger.
Credit ratings are another factor in sterling's favour. Only a handful of currencies are backed by three sovereign AAA credit ratings. Sterling is one. America, Euroland and Japan are not. Germany is a member of the elite club but does not have the benefit of its own currency. The value of a triple-A rating has soared as so many of its traditional holders have fallen by the wayside. By consensus, the three major US credit ratings agencies rate sterling a better risk than the dollar.
Currency appreciation is only one aspect of a transaction; the underlying asset is equally, if not more important to the eventual profitability of an investment. UK residential property is a sleeping tiger, at least according to the Asian investors who have been building up their portfolios in the last year and a half. While provincial prices have stalled, depressing the mortgage lenders' house price indices, the demand for premium properties, especially in central London and the home counties, has continued to grow. The affordability of sterling has undoubtedly encouraged overseas investors.
Evidence of the ongoing boom comes from Rightmove, whose price index hit a record in April, beating the previous high of May 2008. Serious investors are becoming actively involved in UK real estate and many of them are based overseas, buying sterling to get into the game. With upward pressure on UK property prices as well as the pound itself it would not be an exaggeration to describe sterling as the new rising star of the currency world. The robustly positive sentiment among investors suggests it has further to go.
If you would like more information please contact me directly or check out our BE currency page
It took investors a while to realise the significance of this buying opportunity. For most of the last five years they were content to stick to the traditional safe havens - the yen, the dollar, the euro and the franc. That is no longer the case. In the past 12 months the smart money has been moving gently into sterling. The flow has seldom been obvious and the moves never spectacular but the pound has quietly moved ahead. Those who got in on the ground floor in July 2011 are already looking at profits of 5% or more.
That does not mean there is nothing left in the pot. Far from it. From a technical perspective sterling is well-placed to double that gain in the next 12 months. Just look at the opposition: Japan's national debt is huge, more than double its annual gross domestic product, and the government is making no effort to reduce it. America owes more than it can produce in a year and is still printing money. The euro is fighting for its survival, with Spain lined up to join Portugal, Greece and Ireland in the bankruptcy basket. Switzerland's currency is shackled to the euro by the Swiss National Bank's determination to prevent it getting stronger.
Credit ratings are another factor in sterling's favour. Only a handful of currencies are backed by three sovereign AAA credit ratings. Sterling is one. America, Euroland and Japan are not. Germany is a member of the elite club but does not have the benefit of its own currency. The value of a triple-A rating has soared as so many of its traditional holders have fallen by the wayside. By consensus, the three major US credit ratings agencies rate sterling a better risk than the dollar.
Currency appreciation is only one aspect of a transaction; the underlying asset is equally, if not more important to the eventual profitability of an investment. UK residential property is a sleeping tiger, at least according to the Asian investors who have been building up their portfolios in the last year and a half. While provincial prices have stalled, depressing the mortgage lenders' house price indices, the demand for premium properties, especially in central London and the home counties, has continued to grow. The affordability of sterling has undoubtedly encouraged overseas investors.
Evidence of the ongoing boom comes from Rightmove, whose price index hit a record in April, beating the previous high of May 2008. Serious investors are becoming actively involved in UK real estate and many of them are based overseas, buying sterling to get into the game. With upward pressure on UK property prices as well as the pound itself it would not be an exaggeration to describe sterling as the new rising star of the currency world. The robustly positive sentiment among investors suggests it has further to go.
If you would like more information please contact me directly or check out our BE currency page
