Thought of the day
14.09 - Will sterling's rebound harm stocks?
Sterling jumped 0.8% versus the US dollar on 14 September, after the Bank of England (BoE) issued strong guidance that it’s preparing to raise rates to return inflation sustainably to target. The pound had already appreciated this week as August data showed UK CPI had risen to 2.9%; it has gained about 3.7% versus the euro and 4% versus the dollar in the last three weeks.
Sterling appreciation is unlikely to be a deciding factor in the decision to hike, but the pound’s strength, as well as the effect of rising inflation on consumers, is creating problems for UK stocks.
- Currency fluctuations have a big impact, since around three-quarters of FTSE 100 revenues come from overseas. Sterling’s earlier depreciation after the Brexit vote produced a big spike in earnings. Now the currency tailwind should fade completely by year-end.
- The drag on earnings may get worse. While the pound is still vulnerable to setbacks as the Brexit negotiations progress, inflation is likely to continue to rise. It will peak in October, according to the BoE’s forecasts, which should maintain upward pressure on the pound. Our GBPUSD forecast is 1.36 in 12 months from 1.33 currently.
- The consumer sector has slowed recently, with inflation biting into real wages – a trend we expect to continue as the year progresses.
So we believe UK equities will continue to underperform. The FTSE 100 has gained 2.6% this year while the Euro Stoxx 50 has risen 7%. Within Europe, CIO is underweight UK equities versus Eurozone stocks.