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Finance | PMW
Following the effects of ‘globalisation’ Harold Wilson’s famous protestation that a fall in sterling would not affect “the pound in your pocket” is even less true now than it was then. sterling by half, making a further fall in the value of sterling inevitable. To add to the gloom, reference was made to the bleak outlook of the PMI Markit Composite series (which predicts business activity), but this data has always been speculative in nature and has signalled seven recessions during a period over which there only turned out to be one. It is interesting that the Bank has chosen to emphasise the negative. Finally, to seal sterling’s fate, it was hinted that a further cut in the Bank Rate was likely by the year end. With interest rates already so low I am not convinced about the benefit of further interest rate reductions. One of the principal objectives is to improve capacity for discretionary spending by mortgage holding consumers, but only around a half of the UK mortgage stock is at a variable rate and even if passed on in full to those on a variable rate, the latest cut is worth little more than £20 per month for each £100,000 owed. It is already known that retail banks struggle to maintain their profit margin when interest rates are very low, with the consequence that benefits passed to the consumer become less efficient. The Bank of England has recognised this by introducing the Term Funding Scheme, an innovative arrangement to help retail banks to give consumers the benefit of the rate cut. However, I suspect that the same objective could have been achieved in a different way, without the need to cut the Base Rate. It is doubtful that a low pound is going to provide a lasting benefit to the UK. Traditionally, it has helped exporters but the fact is that we do not manufacture a great deal in the UK any longer and what we do export is often dependant upon the import of
raw materials that become more expensive when our currency weakens. Furthermore, overseas firms account for around 40% of the top 100 UK exporters and such firms will not appreciate the depreciation in their earnings that would result. The decision to extend Quantitative Easing; the purchase of UK government bonds, by £60 billion to £435 billion was a little more controversial and was passed by only a slender majority of the Bank’s Monetary Policy Committee (MPC). Once again, there are doubts about whether the benefit of this will be efficiently transferred to the wider economy. I suspect, looking at these measures in the round, that the Bank of England has prepared the ground for the Treasury to announce a substantial infrastructure investment programme as part of the Autumn Statement. This would be financed by the issue of further government debt that will be cheaper because of lower interest rates and more attractive to foreign investors because of a weaker sterling. It is quite evident that those whose financial and other assets are largely sterling denominated have become materially less wealthy in global economic terms. Following the effects of ‘globalisation’ Harold Wilson’s famous protestation that a fall in sterling would not affect “the pound in your pocket” is even less true now than it was then. However, I started by saying I would find something to cheer about and, notwithstanding the considerable haul of gold and other precious medals that Team GB has added to the nation’s wealth, the UK will benefit from the fact that it has more overseas investment than overseas debt. The weaker pound serves to enhance the value of this differential, a good example
being the recent surge in the FTSE 100 share index that has been amplified by the considerable overseas earnings of the UK’s largest companies. As Clients of PMW’s Wealth Management and Investment Review Services have also been given a relatively high allocation to overseas assets in recent years, I am pleased to report that this has resulted in excellent investment returns over recent months, giving them something extra to cheer about.
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Simon Lewis is writing on behalf of Partridge Muir & Warren Ltd (PMW), Chartered Financial Planners, based in Esher. The Company has specialised in providing wealth management solutions to private clients for 47 years. Simon is an independent financial adviser, chartered financial planner and chartered fellow of the Chartered Institute for Securities and Investment. The opinions outlined in this article are those of the writer and should not be construed as individual advice. To find out more about financial advice and investment options please contact Simon at Partridge Muir & Warren Ltd. Partridge Muir & Warren Ltd is authorised and regulated by the Financial Conduct Authority. Telephone: 01372 471 550 Email: simon.lewis@pmw.co.uk Website: www.pmw.co.uk
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