Sarasin’s Monson on why sterling can keep rising

Sarasin’s Monson on why sterling can keep rising

Asset allocation habits of UK advisers and their clients mean sterling can keep rising, according to Guy Monson, chief investment officer at Sarasin and Partners.

Mr Monson, speaking at the Dynamic Planner conference in London on 31 January, cited a recent report from the Bank of England’s Financial Stability report from November 2017.

This report is compiled by the central bank’s financial policy committee, which is chaired by Mark Carney and on which Financial Conduct Authority chief executive Andrew Bailey sits.

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The report noted how overseas residents have significant holdings of UK assets - amounting to around 420 per cent of  GDP in 2017.

UK residents also have significant investments abroad, amounting to around 415 per cent of GDP.

Net acquisition of foreign assets by UK residents was around 7 per cent of GDP in the twelve months to 2017 Q2, while net purchases of UK assets by overseas residents amounted to around 11 per cent of GDP, the report stated.

Mr Monson noted the assets overseas investors buy in the UK, typically government bonds and commercial property, have performed quite poorly over the past year, while UK investors, particularly pension funds, have substantial holdings in international equities, which have performed well, particularly in the context of the weakness of sterling relative to other currencies which had the effect of boosting returns.  

This difference in the performance of the assets narrows the gap of 5 per cent of GDP (420-415) between the liabilities created for the UK economy when overseas investors buy UK assets, and when UK investors buy overseas assets.

Mr Monson said: “It goes a long way to explaining the recent strength of sterling and is a fascinating side effect of Brexit.”

The narrowing of the gap helps to boost the value of sterling because those investments appear in the national accounts as liabilities, because they could be sold at any time, while the overseas investments made by UK investors appear as assets because they can be sold and brought back to the country.

Because there are more assets held by overseas investors into the UK than vice versa, this has the effect of making the country’s financial position look worse than it is, so a narrowing of the gap makes the country’s economic position look better, and boosts sterling, in Mr Monson’s view.

However, in the long term it is much better for the UK economy that such a deficit exists. This is because the inflows of capital from overseas help to fund the countries current account deficit, which is the difference between the amount the UK spends on imports and what it receives from exports.

Bank of England governor Mark Carney has described this as the UK “relying on the kindness of strangers.”

In the Financial Stability Report, the Bank of England said there was no sign of overseas investors' desire to buy UK assets wilting, except for a hostility to buying UK equities.