What's going on?
With the UK locked in tense negotiations with the European Union (EU) this week regarding the terms of its Brexit, some investors believe the value of the country’s currency could soon fall beneath longstanding lows.
What does this mean?
The coronavirus pandemic and its global ramifications have understandably loomed large in investors’ minds this year. But as the December end of the UK’s EU withdrawal “transition period” draws nearer, analysts are increasingly worried about the prospect of a “no-deal” Brexit – or one in which the UK potentially breaks international law. If that happens, investors could ditch riskier global bets; and according to Allianz Global Investors, the pound’s value in US dollars could drop to $1.14 versus $1.30 now – its lowest since 1985.
Other analysts admittedly think that’s an unlikely scenario. Investment banks Goldman Sachs and Morgan Stanley, for example, reckon a deal is more likely than not – and most experts think the pound should increase in value against the dollar next year. Then again, you know what they say about experts…
Why should I care?
For markets: Bear trap.
A weak currency isn’t all bad news: foreign buyers getting more bang for their buck (or euro, or yuan) could buy more British products, boosting the UK economy. But investors might still be cautious: a seemingly attractive stock market valuation may belie weak post-Brexit UK company earnings growth potential. Those who’d bought British stocks might end up snared in a so-called “value trap”, hoping for a recovery that never comes.
The bigger picture: The lady is a tramp.
It’s not just the UK’s trade policy causing problems. French luxury goods giant LVMH on Wednesday pulled out of its planned $16 billion takeover of American jeweler Tiffany’s, blaming US trade taxes for making business more expensive and a deal less attractive. Tiffany’s now plans to sue to force through the purchase.