Low value of sterling encouraging overseas investors

March 12th, 2010 by Chris St Cartmail

Is there a silver lining to the low value of sterling that has hit the headlines in recent days? According to experts, our exports will be cheaper and so boost manufacturing, companies with foreign earnings will be in a good position, and we will see more tourist pounds in our shops. With regard to the export sector this has not fared as well as had been expected but this is more likely to be to do with weak demand in our export markets such as the eurozone. More about the eurozone later.

At the Business Sale Report, we think there might be another reason the cheap pound could benefit UK plc. Business owners who are thinking of selling would do well to investigate the possibility of marketing the business abroad. Overseas investors can buy larger businesses in the UK than they would have been able to do in the past. Of course, revenue would still be in sterling but if, after holding the company for a while, the currency appreciated then the investor would make a profit on the sale. Inward investment is bound to help UK plc. A recent survey by Standard and Poors has also suggested that businesses with strong overseas earnings, particularly in Asia and America, are attractive to other UK firms looking to increase revenues and hedge their currency risk.

In our view, sterling is undervalued for a number of reasons. In the first instance, the markets have become concerned about the possibility of a hung parliament, which is not necessarily a bad thing given that there is less to separate the main political parties these days, but it does create uncertainty. Markets hate uncertainty more than anything. However, once a new government is formed it simply will not survive unless it has a credible policy to cut the deficit. This should help to support sterling.

So what about the Euro? Against the pound it looks strong at the moment but the eurozone’s problems are really only just beginning. There will need to be deep cuts in public spending in Southern Europe and they will have to lower wages and prices in order to remain competitive with Germany, the strongest economy in the Eurozone. Unless Germany can power ahead with strong economic growth to offset the problems in the the weaker european countries then the prospects for the euro are not very good in the medium term.

The weak pound is also, in some part, due to the perception that we have a poor manufacturing and export base, so increased competitiveness in exported goods is not going to benefit us. This is not really true. The UK is among the leading exporters of manufactured goods in the world. Germany and China, of course, are way out in front, then comes the USA, followed by Japan. But in fifth, sixth and seventh places, in a tight group, are the UK, France and Italy. What is more some of our manufactured goods like defence, where we are a global leader, are seen as having better than average growth prospects. After all, the world doesn’t seem to be getting any more peaceful.

The weak pound has fuelled the UK’s export market to such an extent that British exporters are more confident about future export growth than their counterparts in the Eurozone, according to the latest European Business Trends report by accountants and business advisers BDO LLP.
However, while UK confidence around exports is increasing, so too is the threat from inflation. The BDO Inflation Index reveals that Britain experienced the largest ever increase in the annual rate of inflation in the fourth quarter of 2009. The BDO inflation index rose 99.2 in January, a significant increase compared to October 2009’s reading of 93.8. This compares to the Eurozone inflation index which rose to 89.6 in January from 89.2 in October. This may indicate an earlier raising of interest rates which will help underpin the value of sterling.

Also it is quite clear that the Bank of England’s remit is to target inflation and economic stability, not exchange rates. Whereas many countries have made it clear that they are very keen to keep a high value currency, no matter what. This of course is bound to attract capital inflows and speculators at the expense of the pound.

The currency issues aside, UK plc is still a very good place to do business especially when compared to other countries. Perhaps the most obvious advantage that the UK has over other European countries is its flexible labour laws, which translate into lower hiring costs, uncomplicated takeover rules, and a generally non-protectionist government that welcomes foreign ownership of UK companies.