Tuesday 26 September 2017

Greece now, UK next as Scots ready for pound plunge

Rodney Jefferson

While the eyes of the world focus on Greece’s debt crisis, investors in Edinburgh are busy preparing for the UK to be next.

Turcan Connell, which caters to rich families, expects the pound to lose between 20pc and 30pc against the dollar once investors turn their sights on Britain as the government sells a record amount of debt.

Concern that Greece won’t be able to cut its budget deficit helped send the euro 5pc lower against the dollar this year.

“Alarm bells were ringing in Greece for a long time and when it happened, it happened very quickly,” Haig Bathgate, head of strategy at Turcan Connell, said at the company’s offices in the Scottish capital. “The UK is in a similar predicament. It could be hit very hard.”

Money managers in Edinburgh, where investment decisions have been made on behalf of insurers, pensioners and the wealthy for two centuries, are maneuvering to protect assets from the UK economy as it limps out of its worst recession on record.

Bruce Stout, whose Murray International Trust Plc in Edinburgh has doubled over the past five years, said the chance of a plummeting pound are “better than even” and his biggest holdings are in Asia and Latin America. He called sterling a “very vulnerable currency.”

UK fund managers at Aegon Asset Management and Scottish Widows Investment Partnership, together responsible for more than £30bn, said in January they are buying companies that do the bulk of their business abroad.

‘Very dire’

“When there’s a fiscal crisis, the markets tend to punish that country very quickly,” said Bathgate, who is responsible for £560m.

“I don’t think Britain is in nearly as bad a position as Greece. We’ve got a good taxation system, however the position of the economy is very dire.”

The UK’s budget deficit is roughly the same as Greece’s, both exceeding 12pc of economic output.

Moody’s Investors Service and Standard & Poor’s said last week they may cut Greece’s credit rating as the five-month-old government struggles to curb spending and control its debt.

British Prime Minister Gordon Brown’s government in December increased its planned gilt sales for the financial year ending this month to a record £225.1bn from the £220bn announced in April. Moody’s Investors Service said in December the UK may “test the Aaa boundaries.”

Hung parliament

Brown must call an election by June and some polls signal that no party will emerge with a clear majority.

The pound weakened to an almost 10-month low against the dollar today, taking this year’s decline to 6.5pc.

A YouGov Plc poll published yesterday showed Brown’s Labour Party only two percentage points behind the opposition Conservatives, the narrowest margin for two years.

A so-called hung parliament or signs retail sales and economic growth aren’t recovering as expected might be the catalysts for the pound to accelerate declines, Bathgate said.

The Office for National Statistics last week revised up the rate of economic growth for the fourth quarter to 0.3pc from a previous estimate of 0.1pc.

“There could be a number of triggers,” he said. “If there’s indecision about how you deal with a problem, that’s when things start to fall apart. We could be in the position where the spotlight turns to the UK.”

UBS report

The pound may fall below parity with the euro and drop to the lowest level against the dollar since the mid-1980s should the UK cut spending too quickly, Mansoor Mohi-Uddin, chief currency strategist at UBS AG, said in a February 24 report.

Sterling slid to a nine-month nadir against the dollar last week, trading at $1.52. Zurich-based UBS, the world’s second- biggest currency trader, predicted it could fall “quickly back” to $1.05 or below.

The pound may come under further pressure with the Bank of England resuming its quantitative-easing program, a process of injecting new money into the economy, within the next three to four months, Bathgate said.

Policy maker Adam Posen said February 24 the central bank may expand the £200bn asset-purchase plan should the economic recovery prove weaker than expected.

“If it comes back then we’re likely to be the only people doing that in the world at that time,” said Bathgate. “My strong view is the government is trying to create inflation and devalue the currency.”

Selling bonds

Bathgate said he sold conventional UK government-bond investments at the end of 2008 and only holds index-linked securities because of concern inflation may accelerate.

The firm also has reduced holdings in corporate bonds because of the potential “knock-on impact” from a decline in government securities.

The yield on the benchmark 10-year gilt dropped 24 basis points to 4.03pc last week.

The yield on Greek 10-year bonds fell 6 points to 6.39pc. German bunds, the region’s benchmark debt, declined 18 points to 3.10pc.

Turcan Connell, whose clients typically have at least £5m to invest, was founded in 1998 and oversees about £1bn in total.

Bathgate is responsible for allocating money to different funds, and half is currently in stocks portfolios with 30pc in hedge funds and other so-called alternative investments.

Bloomberg

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