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March 1, 2013 6:30 pm
In the 1970s, Britain was known as the “sick man of Europe”. If some of the gloomier assessments of UK prospects are to be believed, it’s a sobriquet we could soon be stuck with once again.
Moody’s downgrade of the UK’s sovereign debt rating is the most public manifestation of Britain’s declining economic health, but in the foreign exchange markets, the symptoms have been present for some time. At the end of 2007, a pound bought two dollars. Now it buys $1.50 – a decline of 25 per cent.
Against other currencies, the decline is, in some cases, even more precipitous; visiting Australia was a joy when a pound bought A$2.58 in 2007. It has since slid 42 per cent to A$1.48, making trips Down Under eye-wateringly expensive.
Some think that with the US poised for another round of political brinkmanship and the Italian election having delivered no clear winner, the pound could regain some of its “safe haven” status, despite weak UK economic growth. Others are not so sure.
“With the government and the Bank of England seemingly more than content with a lower pound at the moment, and with Moody’s downgrade of the UK last week, it is likely that sterling will remain reasonably low for some time,” says Nigel Green, chief executive of the deVere Group, the independent financial advisers.
Such fears appeared vindicated on Friday, when poor manufacturing data prompted the pound to slip below $1.50 for the first time since July 2010.
The long-term record of sterling does not inspire confidence, either. Go back to 1965, and a pound bought 11.5 Deutschmarks. Today, adjusted for the replacement of the mark with the euro, it buys a little over two.
The chart of sterling, compared with the dollar and the Deutschmark, shows that the pound has been in decline practically ever since 1944, when the Bretton Woods conference effectively made the dollar the world’s reserve currency.
For many, the impact of a weaker pound will be felt in higher fuel and energy prices, and more expensive holidays. But for some the consequences could be more serious. FT Money writers look at what a weakening pound could mean for those who have retired or bought property outside the UK, who have income or outgoings in foreign currency, or who are exposed to currency movements via their investments.
Bank customers who have incomings and outgoings in different currencies, and are exposed to currency movements, have basically two options: individual or multicurrency accounts, writes Elaine Moore.
Both allow customers to take advantage of, and shelter from, currency fluctuations, as well as making life easier for those with income streams in two or more currencies, those who frequently travel abroad or who have permanently moved overseas, but still have financial obligations in the UK – such as maintenance to an ex-partner, outgoings on a rental property or education costs
These accounts remain niche for private customers, according to Mark Bodega at HiFX, the currency broker, who warns that in currency markets a significant gain can quickly turn to a significant loss. And although many banks offer “free” services, the exchange rate provided is often poor, which can act as a hidden fee.
However, the range of currencies now available to individual customers is growing. Bank of China, for example, offers UK customers the chance to open a renminbi deposit or current account so long as they hold a minimum of £50 (Rmb472) in a
current account or £2,000 (Rmb18,900) in savings. It pays a fixed rate of 0.45 per cent for one year. There is no fee to open either account and customers can opt to convert their money at any time, at which point they will be charged the bank’s daily conversion rate.
The Co-operative Bank offers current and savings accounts in 13 different currencies for customers who already hold a UK account. Deposits can be held in Canadian dollars, Swiss francs and Japanese yen, among others, at a cost of £20 every
The interest paid depends on the currency held. US dollar deposits receive no interest, for example, but those in South African rand earn at least 1.5 per cent.
Savers who want to switch their money between more than two currencies can open a multicurrency account with offshore accounts offered by banks such as Barclays, Lloyds, HSBC and Citibank.
These umbrella accounts allow users to hold their money in a combination of currencies within a single account.
Providers say they are cheaper than operating numerous individual foreign currency accounts, with the added benefit that just one minimum deposit is required.
However, not all banks offer access to the same currencies, and charges and exchange rates differ between providers.
Citibank, for example, allows free withdrawals of up to £4,000 every three days in 21 currencies, and pays interest on money held in sterling, euro and US dollar accounts. But customers must deposit at least $100,000 (£66,000) to benefit.
A weaker pound brings bad news for UK-based owners of overseas holiday homes, especially if their mortgage is with an overseas bank in a currency other than sterling, writes Tanya Powley.
Service charges, property maintenance costs and local taxes are also likely to be in local currency – and costing considerably more in sterling terms than at the start of the year.
“It’s been very much a case of missed opportunity,” says David Kerns, head of private clients at currency broker Moneycorp. He points out that homeowners who locked into last year’s high – when the pound was worth €1.28 – with a regular payment plan would be sitting pretty now.
Regular payment products enable homeowners to lock into the current exchange rate over a set period from six months to a maximum of 24 months.
But as sterling has fallen a great deal recently, homeowners will have to make a call on whether they lock into today’s rate if they think sterling could weaken further, or wait for an improvement.
For for Britons contemplating buying overseas, potential purchases are becoming more expensive every day. But homeowners who are already in the process of completing the sale of a property in Europe or the US will get a boost.
Andy Scott, premier account manager at HiFX, the currency broker, says it has seen an increase in the number of clients who are putting their houses on the market to try to take advantage of the current value of the euro against the pound.
“For clients selling property in places like Spain this softens somewhat the financial hit that they’ve taken due to the drop in property prices in the last five years,” explains Scott.
Both buyers and sellers can use a forward contract to secure favourable rates.
A forward contract means that you can buy the currency now and pay for it later – for example, when you complete on a property. You will be asked to pay a deposit of around 5 to 10 per cent and the remaining balance at a set value date in the future.
“The settlement date can also be changed should the sale complete sooner or later than originally planned, subject to any interest related charges. If the exchange rate moves at all in that period this
will not affect the original rate secured,” says Scott.
More than a million Britons are currently being paid state or personal pensions from the UK while living overseas – and those regular payments have been steadily eroded by the weakening pound, writes Josephine Cumbo.
British expat pensioners in Europe have seen their monthly retirement slashed by an average of 8 per cent just since the beginning of the year.
For those who have decamped to Australia, another country popular with older Britons, the squeeze over the past years has been very sharp.
Expats who want certainty over their pension payments could set up a system to transfer their pension from the UK at a fixed rate each month.
An exchange rate can be agreed with a currency broker, which can be locked in for up to two years. “This makes perfect sense for those who think the exchange rate is going to fall and they are looking for certainty,” says David Johnson, director of Halo Financial, foreign currency specialists.
Those planning on retiring abroad permanently could also consider holding some of the pension investments in the currency of that country. “For example, those looking to retire in Europe may look to euro-denominated investment funds,” says Sarah Lord, managing director of Killik Chartered Financial Planners.
“Many traditional pension contracts will not provide this level of flexibility, only allowing investment in sterling-based funds. Some self invested personal pensions will allow other currency based investments to be held and therefore consideration should be given to this approach.”
Advisers say that qualifying recognised overseas pension schemes (Qrops), where the entire pension fund is shifted offshore, have also become increasingly popular for those looking to move abroad.
“Because they allow payouts to be made in various different currencies, the holder isn’t as exposed to the vagaries of the current markets,” notes Green.
Those drawing a state pension while abroad could elect for payments to be paid into a UK account instead of an overseas account, and then transfer funds to their country of residence at a time of their choosing.
The recent softness of sterling has been a source of both anguish and delight to stockmarket pundits, who have issued reams of advice on how to either protect one’s gains or cash in on the new paradigm of a weak pound, writes Norma Cohen.
However, several analysts are taking a much more sober look at what the recent weakness means for UK investors. And the conclusion is that it does not mean all that much – after all, the decision to cut the UK’s AAA credit rating had little impact on bond markets and was followed by a rise in equities.
Trevor Greetham, head of asset allocation at Fidelity, pointed out that professional investors had been pricing in a downgrade for months. “Sometimes, the ratings agencies are best ignored,” he said.
Advisers note that weaker sterling will benefit those companies that export a lot, or that derive a significant portion of their sales outside Britain, particularly those that are growing in developing economies.
Currencies in emerging markets are likely to strengthen as the pound falls, boosting sterling profits. Unilever, for example, generates 55 per cent of sales from fast-growing emerging markets – it sells €1bn of Magnum ice cream in China every year. Many big mining and oil companies account and declare dividends in dollars, so a weaker pound boosts sterling dividends. Such companies also tend to be heavily represented in UK equity income funds.
Norman Villamin, chief investment officer at Coutts Europe, notes that equities listed in countries with falling currencies have been among the best performing of any this year. Swiss share prices rose by 9 per cent as the franc fell, while the Nikkei has rallied strongly in anticipation of a falling yen. A weaker currency makes UK shares (and real estate) cheaper for overseas investors.
However, some have warned against making equity or fund investment decisions based on what is happening in the foreign exchange markets. Villami adds that it is only a matter of time before policymakers in other economies begin to pull on the same policy levers as the Bank of England – when they do, sterling’s recent losses could easily be reversed.
“As the headlines scream about markets nosediving and the pound plummeting, it’s important for investors to hold their nerve,” said Jason Hollands at Bestinvest. “It is easy to get distracted by the short term ‘white noise’ of the markets.”
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