The mornings are getting lighter and so are the valuations of the world’s largest corporates. Is the Chinese story a bump in the road or will it be more systemic as time goes on? Opinion is as divided as those who like to eat Haggis and those that don’t.
What do we have up this week? The main UK data will be the publication of the GDP figure from the Office for National Statistics on Thursday. Market expectations are for a figure of 0.4% which will confirm we had a weak second half to the year. Sterling has been thrown around more often than a koala bear in a washing machine since Christmas with a 4% decline. Remarkably, it has come out fairly well in the wash. As I’ve mentioned numerous times I think Sterling will move lower and the move on Friday was short-term respite rather than any change of trend and sustained move higher. If you have any requirements to convert GBP into another currency please contact a member of the Aston team prior to Thursday.
You would be forgiven for thinking from all the newspaper headlines that we’re in for Armageddon part deux after the subprime/Lehman Brothers crisis of 2008. Whilst I think some commentators are overplaying how bad things will get I do think that growth fueled by debt is coming to an end for the emerging market economies. It may be a case of playing pass the parcel from the economic turmoil felt in the European southern economies to the ‘BRIC’ economies and other Emerging market countries. China is going through a transition to a service economy and who knows if their growth figures of 6.5/7% are even remotely close to the truth. They still have major steps to make to integrate with the global economy and so expect major fluctuations this year in global currencies and stock markets. Couple this with the declining oil price and the problems this is causing African economies as well as the Middle East then it is going to be a bumpy ride this year for sure. Will the world come to an end? Nope. It will just be a world of more ups and downs in 2016.
Let’s throw in how a potential ‘Brexit’ may affect the UK. The ‘Brexit’ story will be very much in focus in the coming months. What would happen to Sterling if a ‘Brexit’ transpired? Well, the variables consisting of expected time and terms of the referendum are significant so looking at any technical analysis in terms of graphs and projections won’t be any help until we have some clarity. My view is I would expect a run on the pound and Sterling would likely depreciate around 4% in the run up to the vote should polls indicate that an ‘out’ vote was looming. If we look at the Scottish referendum as a recent example GBP lost around 4% in the run up and then rebounded once the status quo remained.
I considered Sterling overvalued last year although with Sterling now sitting at much lower levels I think we’re probably approaching ‘fair value’ levels. If the UK did leave then investors would probably rush for the exit doors which would throw into sharp focus the UK's bloated current account deficit. Foreign direct investment currently props this up and this funding could quickly reverse in the event of an "Out" vote.
With current financial market instability this has highlighted the pound’s vulnerability to the UK’s still elevated current account deficit. The ongoing drop in the price of crude oil is also acting to push back expectation for BoE monetary tightening further into next year. If low oil prices are sustained and we could conceivably push to 20 dollars a barrel, then the expected pick-up in inflation will be delayed until the second half of this year making it difficult for the BoE to justify raising rates while inflation is below 1%. The best outcome for the UK would be George Osborne and David Cameron negotiating a better deal for the UK to remain in the EU with powers to make the UK a more competitive economy, to stem migration and to determine a better working relationship between EU and non EU countries. Will this happen? Answers on a postcard please.
As always I suggest having a plan in place to mitigate your currency risk. GBP/EUR pushed lower into the 1.28s last week although has since rebounded after Mario Draghi spoke on Friday and said he may implement more stimulus measures if necessary.
If you look at the graph below you can see that we’re almost back to where we started 12 months ago in January 2015 on GBP/EUR. If you are a seller of Euro’s into Sterling this is a good level to convert at compared with where we’ve been over the past 9 months. EUR buyer? I would contact a member of the Aston team to discuss your upcoming requirements and we’ll put a plan in place for you.
USD seller? Fill your boots. If you can achieve anything under 1.45 historically you’re in a very good position. Have a look at the graph below to see where we’ve been over the past 12 months.
I’m sure you can all remember that it wasn’t long ago when 1.60 was ‘fair value’. Do you need to convert GBP into USD? If so, I would suggest placing market orders to the upside to take advantage of any spikes on an intraday basis. Please contact myself or one of the trading team to discuss appropriate levels to aim for.
If you have any questions please do let me know.
Have a fantastic week.
Written by Liam Alexander