Overseas investors boost sterling

A wave of foreign investment into the UK, including billions in M&A deals, has contributed to sterling’s rise to multi-month highs, say foreign exchange bankers.

Overseas investors have acquired more UK assets than in any comparable period since 2008 so far this year,with $32.6bn-worth of inbound mergers and acquisitions announced, according to figures from Dealogic.

While global M&A volumes have dropped continuously over the past five quarters and remain far below the market’s 2007 highs, foreign companies are buying more assets in the UK than domestic companies are abroad for the first time in four years. Analysts and traders say this has helped buoy the pound.

Last week, sterling hit its highest level against the euro since 2008 and is at an 8-month high against the dollar, marking a steady rising trend in recent months that economists say is starting to pose a headache for policymakers.

A popular theory for the pound’s strength has been that it is caused by haven demand in Europe, with sterling tending to gain value when eurozone jitters have increased. Fading expectations of a fresh bout of monetary easing in the UK have also led investors to favour the pound over the dollar or the euro, while demand for sterling from sovereign wealth funds is also thought to be a factor.

But analysts at HSBC, which has one of the biggest sterling trading desks in the City of London, believe that the increase in M&A deals this year is the biggest factor driving sterling. They say the M&A inflow “offers the prospect of a firmer tone to sterling for some time to come”.

Foreign exchange bankers at Citigroup, BNP Paribas and Credit Suisse also said that M&A inflows were a major factor behind the recent strength of the pound.

Not every M&A deal has a substantial currency impact as some are financed through local borrowing or share swaps. But sterling often rises when deals are announced as markets price in expected buying pressure on the pound.

Analysts cite recent deals such as French utility company GDF Suez’s takeover of International Power as among those transactions giving a boost to sterling.

The UK has long attracted foreign buyers of key assets as it is widely seen as Europe’s most open market for takeovers. As a result it is the world’s second largest market for M&A after the US. With significant revenues from FTSE 100 companies derived from overseas, an acquisition gives buyers exposure to high growth emerging markets.

“While we have seen a flash of high profile acquisitions of UK assets by Chinese acquirers in the past few months, we have also seen a steady flow of US investors into the UK,” said David McCorquodale, corporate finance partner at KPMG.

Richard Sheppard, head of UK M&A at Deutsche Bank, said: “The UK is an attractive market for well-capitalised acquirers, domestic or foreign - there are a lot of high quality, well-run companies here with emerging markets exposure, strong technology and brands, or both.”

Regulated industries, such as the water sector in the UK, have attracted investment from China, Japan, Hong Kong, Australia and Canada. Earlier this year China’s sovereign wealth fund CIC bought an 8.6 per cent stake in the capital’s water supplier Thames Water. On Thursday, Japanese trading house Itochu announced it acquired a 20 per cent stake in Bristol Water, the first Japanese investment in the UK water sector.