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COLUMN-Rising pound good news for Bank of England, not so much for UK stocks: McGeever

Wed, 13th Sep 2017 14:30


(The opinions expressed here are those of the author, a columnist for Reuters.)

By Jamie McGeever

LONDON, Sept 13 (Reuters) - Sterling's bounce back to a one-year high against the dollar this week may be welcome news for the Bank of England, but not for UK stock market investors.

The pound's recovery, which has also seen it reach a six-week peak on a trade-weighted basis, may help cool the bubbling price pressures that have lifted inflation to 2.9 percent, well above the BoE's 2 percent target.

But as far as sterling goes, what's good news on the inflation-fighting front tends to be bad news for the leading FTSE 100 stock market.

The FTSE is one of the most globally exposed major markets in the world, with some 70 percent of its earnings coming from overseas. Bouts of sterling strength within its broad post-referendum decline have corresponded with FTSE underperformance.

In late August-early September last year, trade-weighted sterling rose three weeks in a row, and the FTSE fell around 4 percent. In that time, the MSCI World stock market index slipped a more modest 2.5 percent.

Other periods of sterling strength since then include: November last year (FTSE -3 percent, MSCI +2 percent); mid-March through end-April this year (FTSE -3 percent, MSCI +1.5 percent); and the last three weeks (FTSE -1 percent, MSCI +2.5 percent).

The FTSE's latest stumble contrasts sharply with the MSCI World's rally to a record high.

Notwithstanding its recent uptick, sterling is still down 15 percent against the euro and 12.5 percent on a trade-weighted basis since the Brexit vote. All else being equal, a 15 percent depreciation in the pound means an instant 15 percent increase in profits for FTSE-listed companies.

The pound's steep Brexit-driven depreciation has minimized the damage done to the FTSE, which regained its poise barely a week after the referendum.

But the pound's sustained weakness since then means an unhedged euro zone-based fund manager holding UK stocks is still under water. The FTSE has underperformed the benchmark Eurostoxx 50 by more than 15 percent in euro terms since the Brexit vote.

Sterling's weakness since last year's Brexit referendum has caused a headache for BoE policymakers. They have viewed the resulting jump in inflation as transitory, but further exchange rate weakness could change that.

It could push inflation above 3 percent, further depress UK workers' real earnings and squeeze consumer spending. An inflation-containing interest rate hike would be difficult to sell in the European Union's slowest-growing economy, but more Bank officials would be tempted to pull the trigger.

The latest exchange rate fluctuations, together with soft wage growth figures on Wednesday, will no doubt figure prominently at Thursday's BoE policy meeting, where rates are widely expected to be kept on hold at a record low 0.25 percent.

A stabilization or gradual creep higher in sterling's exchange rate may come as a relief to Mark Carney and Co. at the Bank, but it casts a cloud over the FTSE.

(Reporting by Jamie McGeever; Editing by Hugh Lawson)




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