As with so many things since June, opinions on the pound’s renewed plunge tend to correspond to views on Brexit. If you were in favour of the UK leaving the EU, the drop is a much-needed boost to exporters. If you were against, it’s a big hit to living standards.
The two aren’t mutually exclusive, of course, though it looks likely the latter will emerge before the former. How times have changed since January, when I noted in this column that the currency’s slide against the dollar since the middle of 2015 had gone relatively unnoticed.
It’s hard to escape the statistics now: the pound’s precipitous fall since the referendum has made it the worst-performing currency in the world this year, and left it at a 168-year low on a trade-weighted basis.
However, for intermediaries and their clients, sterling’s slump has all but guaranteed – perhaps unexpectedly – another year of sizeable returns.
There’s an air of unreality around many of these returns...The risks have been as real as ever, and currency effects seem unlikely to bail out investors for much longerDan JonesFor years we’ve been experiencing what has been termed the most hated bull market of all time. And the phrase could apply to bonds just as much as equities. More investors than ever think both bonds and shares are overvalued, according to separate surveys published recently from Bank of America Merrill Lynch and the CFA Society. Yet prices keep going up. Yes, bond prices have fallen back recently, but that’s not an established trend just yet.
Underlining this is the fact that every Investment Association sector is currently in positive territory for 2016. That’s a bitter irony given the paucity of fund flows this year, not least because the bulk of those flows have headed for the conservatism of the Targeted Absolute Return sector. These strategies’ natural caution mean the grouping has inevitably posted the lowest return of the 30 main sectors, just 1.1 per cent on average this year.
Clearly, equity funds of all stripes have been given an artificial lift from the falling pound. In the UK, the FTSE 100’s preponderance of dollar earners has seen it reach record highs since the referendum. Abroad, the translational effect of funds buying stocks denominated in other currencies has produced a similar boost.
So there’s an air of unreality around many of these returns. It’s not simply a case of investors overcomplicating things: the risks have been as real as ever, and currency effects seem unlikely to bail out investors for much longer.
Leaving aside the politics, the end of 2016 looks oddly familiar to last year: awaiting a December rate hike in the US, and scrabbling round for an asset class which doesn’t appear overvalued. But the continued ability of markets to confound our worst expectations shouldn’t be discounted, either.
Dan Jones is editor of Investment Adviser
