Brexit impact on Pound, that’s the topic on everybody’s mind. So, what does it mean for your personal finances – for your savings, investments and mortgage?
Brexit fallout has been intense. From $1.46 at the time of the referendum, Sterling has fallen to $1.21 – a drop of 17%. Interestingly it is quite close to Goldman Sachs’s pre-Brexit forecast of a 20% drop. That is the lowest rate in over a decade, and adds to a cumulative fall of 29% which actually started further back, in mid-2014, when the pound was at $1.71.
First, let’s look at the direct effects of the Pound’s depreciation. The key question, of course, is what currency your assets and income are in vs. what currency your current and future expenses and debt (such as mortgages) are in. At the most basic level:
- If all are in Pounds, then you will be less affected, even though all will be worth less in US Dollars or in Euros. For example: you are employed in the UK, your savings are in UK property and bonds, your mortgage is in pounds, and you intend to remain in the UK after retirement. You might find that the direct impact is just that you have to choose your overseas holidays more carefully as they become pricier – a shame, but hardly life-threatening.
- If all, or most, are in other currencies, then Brexit shouldn’t really be a concern for you other than as a market movement like any other, and the question is only whether your portfolio should be readjusted in any way. Example: you are an expat in Hong-Kong, your income is no longer connected to the UK, and your investments are global.
- If your assets and/or income are abroad and your current/future expenses are in Pounds, you’re lucky! For example: you are an expat and you invest internationally but still support family and a home back in the UK, or maybe you intend to return to the UK.
- If your income and assets are tied to the Pound but your expenses are in other currencies, then you need to have a hard look at your financial situation to make sure that you can maintain your standard of living or if you need to make adjustments. For example: you live abroad but your salary (or retirement income )is still tied to the Pound and you still invest mostly in the UK.
Second, there are the indirect effects of the drop in the Pound:
- You may have noticed that UK stocks are doing well – the FTSE 100 is up 16% since the referendum. That’s because even though the price of the shares is in Pounds, a significant portion of the revenues and profits of many of those companies is in other currencies.
- In order to avoid recession, the Bank of England cut the already-low interest rates. In theory, together with the potential for slightly higher inflation (because imported goods and components become more expensive), this should be a double-whammy on real interest rates. However, even though the benchmark rates were cut, Brexit has put UK bonds out of favour, so market interest rates are actually up: 6 month LIBOR is now 1.26% as compared to 0.53% a year ago. So, it is hard to predict how bonds and mortgages will fare in the long term.
- Economic growth is expected to be weak, as jobs are moved out of London to the continent, and trade with the EU suffers. This hurts job prospects and may also outweigh the positive currency effects on UK stocks
Currency movements are virtually impossible to forecast, but the overall picture is not favourable for the UK, as we have discussed previously
The clear message is that in today’s highly integrated world, it makes sense to diversify one’s portfolio globally. Even those who feel that they don’t want to lock-in a loss by doing that now should put in place a plan to gradually diversify over a number of years in order to avoid further losses.