Will Brexit devalue the pound?
The British currency is also suffering from the Brexit chaos. It is so volatile that large investors and companies have long since protected themselves from fluctuations by concluding currency hedging transactions. After years in which the pound has been weakening, the question now arises again of how things will go with the pound sterling. What can tourists from the euro area expect when planning a vacation on the island? Or parents whose children want to spend a school year in one of the popular British boarding schools? With prices between £ 9,000 and £ 15,000 for one of three terms per school year, it's worth keeping an eye on currency fluctuations.
One euro currently costs an average of 0.8968 pounds sterling. In July 2015 - at that time, discussions about Brexit were only just beginning - things looked different. Back then, the pound was a strong currency. If you gave one euro, you only got around £ 0.69 for it. From the point of view of Euroland citizens, the British pound has depreciated by 22 percent since then. Things really went downhill after the surprising Brexit vote in June 2016. Today, Euroland citizens pay around a fifth less for the pound than in 2015.
Britain's new Prime Minister has lost his first vote and has now lost a majority in Parliament. New elections are already being discussed. However, they could be entirely in Boris Johnson's sense.
Good for tourists, bad for importers, risky for investors
In the meantime, Euroland tourists are spending their holidays on the island more cheaply, Euroland companies buy intermediate products there more cheaply and investors get cheaper real estate. In return, imports are becoming more expensive for the British. Since the pound has also depreciated sharply against the US dollar, the decline in the pound is noticeable for the British when shopping for US goods. Anyone who invests in Great Britain always indirectly runs a currency risk. In order to get planning security, experts prefer to switch it off.
Matthias Grimm heads the so-called "Overlay Management" in asset management at the private bank Berenberg. In this role he also deals with the currency hedging of large investors and companies. Can the currency expert still get upset about the political maneuvers in London? Last week shocked him with the turmoil in parliament over the no-deal Brexit law and a break in parliament? “No,” says Grimm. At least not from the perspective of the currency manager, because since the discussions about Brexit, many of his customers have "positioned their open currency positions in pounds in a risk-neutral manner" - that is, hedged them. If the mood boils up, it will be too late for currency hedging. That is why Grimm advises dealing with currency risks before investing, if possible. He says there should be no speculation with currencies. For him, currencies are only "an inescapable side effect of a global investment", the return of which should be drawn from the share or a property.
Currency fluctuations can usually even out in the long term - history shows that. Sometimes one currency is stronger or weaker, sometimes the other. But Brexit makes it clear how high the fluctuations can be in the meantime. "In the short term, a currency event like this can ruin an investment," says Grimm.
Without hedging, the stock market profits would be gone
Anyone who invests large sums in the UK stock market has been able to benefit from the price gains of recent years. The FTSE share index has gained around 18 percent since mid-2016. If you haven't hedged yourself against the devaluation of the pound, the currency fluctuations have consumed these profits. Grimm knows how to hedge: "Share portfolios are hedged using currency forwards with different periods of time," he says. To do this, he analyzes with the customer whether they should hedge the currency risk 100 percent or less. "The design is then based individually on the investor's risk appetite and goals," says Grimm. The security increases in value to the same extent that the pound depreciates and vice versa. The costs of the hedge result from the different interest rates in the euro zone and in the pound area. Those who hedge must also provide liquidity to secure the transactions - the so-called margin calls. Companies are usually granted such credit lines by their banks.
Investors with currency hedging can now watch the discussion about the “no-deal Brexit” in a relaxed manner. As soon as the no-deal becomes more likely, the pound will weaken against the euro. The possible postponement of a Brexit date, however, has allowed the pound to strengthen again in the past few days - unfortunately, the protected investors no longer benefit from such gains.
Since Johnson has been head of government, the fluctuations have been twice as strong
The fluctuations in the pound exchange rate have become so strong that speculators who have bet against the pound or on various scenarios in the political debate in recent years have already left the market. The bets have gotten too hot for many. "Since Boris Johnson was appointed Prime Minister, the fluctuations in the pound rate have doubled," says Grimm. While the volatility of the pound exchange rate was around six percent before, it is now around 13 percent - similar to that of global stocks.
"In the course of a discussion about postponing Brexit, however, the volatility has temporarily decreased again in the past," says Grimm. The currency expert also observes this for other currencies of industrialized countries. Currency volatility has even fallen among the ten big industrialized countries and is now as low as seldom before. So don't panic for currency managers.
If you want to transfer a larger sum to Great Britain in the future, you can now set up a pound account at your bank and benefit from the currently strong euro and the low pound rate when exchanging. The skirmishes between the Prime Minister and Parliament can then be taken more calmly.
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