The British pound is now the whipping boy in foreign-exchange markets, as the baton is handed down from the EUR.
Both have been trashed since late November against the U.S. dollar and gold bullion, and fears of a hung U.K. parliament ahead of elections this spring are causing widespread discontent for gilt, or British bond, investors.
But that’s not necessarily the case for U.K. investors in domestic stocks…
The British pound got hammered again early this week, dipping to 1.47 versus the dollar before rebounding. Since December 1, the pound has dropped a cumulative 9.4%, a significant decline for a major currency. Against gold, however, sterling hit a fresh all-time low yesterday at 753.69 pounds.
Increasingly, the global exchange rate system is gaining volatile momentum as cracks continue to surface in what is largely a dysfunctional mechanism. The exchange rate system is a joke. The dollar took the booby-prize as the Dog of the FX market from 2002 until last November. Since then, the pound and the EUR are the whipping boys.
The pound is plunging in value against the dollar, gold, the EUR and other major currencies at a time when most currencies are largely debt-infested units supported by nothing more than government pledges to print more currency. What’s significant in recent price action is not sterling’s decline vis-à-vis the dollar or EUR; what’s telling is its rapid descent against gold and crude oil.
But if a falling pound is bearish for sterling-based investors in gilts, then the same is not necessarily the case for U.K. stocks…
A sharply lower pound is exactly what’s needed to boost England’s lagging economic recovery.
An export-competitive currency can work wonders for a troubled economy like Britain’s and that’s why nobody in government is exclaiming concern at the moment. Historically, a weak local currency is the tonic that cures corporate earnings, especially companies in England that depend on exports to boost growth. A weak pound is therefore welcomed.
The FTSE-100 Index is down 6% in dollar terms this year but might log smart gains in both local and foreign currency terms later this year if earnings prospects improve.
This is exactly what happened following sterling’s humiliating exit and devaluation from the European Exchange Rate Mechanism (ERM) in September 1992. Within several months, British stocks were off to the races.
At some point in 2010, British stocks will be a BUY. The lower the pound goes, the higher the odds the stock market will react positively as the prospects of earnings growth increases.