Much of the UK press headlines and media air time is focused on ‘Brexit’ – how close it is apparently but the other key issue that periodically makes the front pages as it did last week is the UK’s appalling current account (trade in goods, services + investment incomes + transfers) deficit. While the media love to paint a picture of fractions between the referendum’s stay and leave factions, as we’ve mentioned more than once before a visit to bookmakers’ websites will inform you that there is still a large gap between the stayers and leavers with the stayers on top.
Sterling has been hit supposedly by Brexit fears but in our multi-asset Dynamic fund which has a 100% sterling liability benchmark of UK inflation plus 3%, we have long held a non-sterling position of approximately 30% to reflect our concerns over the UK’s external imbalance not Brexit.
At 7% of gross domestic product (GDP) the UK current account deficit is the stuff that has triggered emerging market sovereign crises in the past although with no external debt as a sovereign borrower, that sort of crisis is unlikely here but it does allow the UK to let the exchange rate take the strain.
Our global equity Growth fund is predominantly a non-sterling investment product aimed at being an adjunct to a UK investor’s assets and is a natural beneficiary of a weaker UK currency.
Since November last year, the trade-weighted index of sterling has fallen sharply versus its major trading partners, good for exporters and anyone with foreign currency and no real concerns just now of inflationary pressure being imported.
Source: House of Commons Library – Economic Indicators April 4, 2016 Number 02811
We have written about this previously in a blog from the end of April last year ‘Current Account Interest’ when the current account deficit to GDP ratio was 5.5%. (UK current account data is released at the end of the first calendar quarter for the previous calendar year).
There are those that say the increase in the deficit is only because our earned income on foreign assets has fallen due to low interest rates abroad and that our trade deficit has stabilised but another economic statistic that gives some concern is the fall in the UK personal savings rate which hit a new low. Whether the UK consumer is spending money on imports or not, it isn’t a healthy trend.
The overall landscape for the current account deficit has deteriorated and with both the Bank of England and the Chancellor not unhappy to see a weaker sterling as a stimulant to economic activity, it’s not difficult to paint a picture whereby sterling remains weak until 23 June 2016. Thereafter, if it is a no vote, there could be some sterling uplift. Longer term the UK needs to save more and spend less – in both private and public sectors.