The other day a friend and I met for a drink in the local area. She wanted to ask me some questions about dealing with some of the financial implications resulting from the Brexit referendum. Given that many other people might have similar questions, I thought it might be useful to quickly do a small write-up here.
In writing it, I realised that the post was getting rather lengthy, so I am going to tackle this in separate parts. Thus, here goes Part 1:
Angela’s situation – sitting on Sterling Cash
My friend, let’s call her Angela – currently has some Sterling cash on her hands, as a result of not going through a property purchase that she had planned. Incidentally, one of the reasons for passing on the property investment was because of the uncertainties on the UK property market (and the UK economy generally) triggered by the Brexit voting decision.
Her “cash” (not cash, but a bank balance) is in British Pounds or Sterling (referred to as GBP from here).
Angela wants to know what she should do with this Sterling cash in order to protect herself financially.
How much has the Sterling value fallen since the Brexit result?
GBP has fallen in value relative to all other currencies. Against the US dollar, GBP was trading as low as $1,41 (meaning £1 was worth $1,41) but then rallied to $1,50 in the four days preceding the voting, as the market participants were betting/anticipating on a Remain result. Two days ago, Sterling closed at $1,2950. From the peak of $1,50, that’s a decrease of 13.7%, from $1,41, it’s a decrease of 8.2%. Against the Euro, it was trading at £0,765 equals 1 euro, whereas two days ago, one needs £0,853 (85.3 pence) in order to buy 1 euro. That’s a decrease in the value of Sterling of 11.5%. It’s not uncommon for an individual stock price (say that of BP, or Apple, or Google) to change 10% from time to time. However in the currency market, a move of 10% in a major currency such as GBP is rather rare!
Regardless whether you value Sterling against the US dollar, the Euro, the Swiss Franc, the Japanese Yen, the Kiwi dollar, or the Australian dollar (or the Mexican peso) – it has fallen dramatically against all of them.
Does Sterling’s drop in value matter?
Should UK people care?
Technically the value of Sterling has only fallen RELATIVE to other currencies. A meal at the pub, or a cup of coffee, still costs the same (for now).
However, if UK residents go on holiday anywhere other than Cornwall, then the cost of their holiday will be about 10% higher. Likewise the cost of any import, say a German car, or a Japanese piece of machinery, will on average be 10% more expensive, because it takes more English pounds to buy the foreign currency. For this reason, the cost of pub meals and cups of coffee may also increase over time (the more components of a product are imported, the more vulnerable the final product is to price increases).
However, for people whose daily life does not comprise going on a holiday or buying a lot of imported goods, there won’t initially be a dramatic impact on their standard of living.
UK residents planning foreign invesments and/or leaving the UK
UK residents who measure their personal wealth using another currency will find that their personal net worth will likely have dropped by 10-15%. This is more academic than practical. However there may be individuals who do actually care a lot about this. In particular people who are planning to leave the UK indefinitely in the near future, or who are planning to make significant foreign currency denominated investments – for those people the 10% drop does matter quite a bit. Say you had been planning to buy a holiday home in France but you have not gone ahead and done it yet. If the price of that property was 300,000 euros then pre-Brexit it would have cost £229,500. Post-Brexit the investment cost now rises to £255,900.
Another example would be a New Zealand couple who have worked in London for several years and have saved up £200,000 as a result of working hard and spending wisely for some years. They are planning to head back down-under and convert all their money to New Zealand dollars when they go. Pre-Brexit every pound was worth NZ$2,06. Now each pound is worth only NZ$1,78. Thus the value of their savings reduces from NZ$412,000 to NZ$356,000 – a decrease of 13.5%.
On the flipside any UK person who has made foreign investment will have seen their investment rally by 10% or more. If a person owns a foreign property, or bought shares in foreign companies, or holds foreign currency in one way or another.
More discussion to follow…..
To somebody working in the trading industry, the above explanations should be fairly basic stuff, however a lot of people do not deal with these matters on a daily basis, hence the explanations.
In the next parts we will look at how to protect oneself from further currency fluctuations, both in theory and also some practical tips.