Is it time to buy sterling?

There might be ways in which the budget could have a longer-term bearing on the pound even if it does not change the outlook for the election.

>> What will be beneficial for the pound?

The UK budget on March 6^th will be viewed with interest in the context of the general election later in the year and, in particular, whether the government can use tax cuts to reverse its disastrous slide in the opinion polls. But while this might be interesting; it is unlikely to be much of a market mover when it comes to the pound.

The Standard Bank continues to believe that the likely transition from a Conservative government to a Labour government will not impact sterling significantly. However, there might be ways in which the budget could have a longer-term bearing on the pound even if it does not change the outlook for the election.

The UK government has been concerned about the poor performance of the UK stock market for some while now. Indeed, Chancellor Hunt and others have publicly bemoaned the stock market situation in the UK as more and more companies choose to list on bourses other than the UKs. The government has talked about ways that this can be addressed and some of these thoughts could be put into action in the budget. One idea, for instance, is to introduce a new ‘British’ Individual Savings Account (ISA) that will reward savers with tax-free returns if they buy UK stocks. Another is to push institutional investors, particularly UK pension funds to direct more of their investments to the UK equity market.

Data suggests that under two-percent of UK listed stocks are owned by UK pension funds; back in 1992 this figure was around a third. Now clearly we don’t know whether any such changes will occur at the budget or later in the year. There are risks with both. A new British ISA could prove a political failure if it is seen to exacerbate the cost-of-living difficulties for many by offering tax breaks to those wealthy enough to be able to put cash into an ISA, leaving behind those that cannot.

On the second, there are many potential problems. One is that if pension funds are pushed to invest more in UK stocks they might choose to take cash out of UK gilts and so potentially undermine that market. But if we assume that the government does go ahead with such policies, could it provide a fillip for the pound?

>> What will drive the pound in 2024?

In the Standard Bank’s view, there are two aspects here. The first is whether any such changes could generate asset flows that lift sterling. It is certainly not suggesting that the amounts of cash involved from any new ISA account or pension fund reallocation could be sufficient to lift the pound, and perhaps not even the equity market. Instead, the issue is whether any such changes focus the minds of global investors on the relative cheapness of UK stocks, especially the domestically-focussed FTSE 250 index. For if this stimulated substantial inflows to the UK it could be interesting. But could it be a source of support for sterling? Probably not. That’s because the correlation between equities and currencies is generally so poor as to be non-existent.

In fact, in the UK any sort of causation between the two seems to run from the currency to stocks and not the other way around given that around 80% of FTSE-100 company revenues are earned overseas. Hence, when the pound goes down stocks often get a lift, and vice versa. But while this route to a stronger pound might be very weak, there is another aspect that could mean a more beneficial impact, at least over the long haul. This relates to the reason why the government might want to boost the UK stock market. For it is not some sort of vanity project but, instead, an attempt to improve corporate performance, particularly investment.

The likes of the BoE have bemoaned the very poor investment record, weak productivity and falling potential growth rate of the economy. Just whether more efforts are made by the Chancellor to turn this around through lifting the stock market remains to be seen and, even if it does happen it will take some time. Currency investors probably won’t have the patience to buy sterling now in anticipation of what may turn out to be false hopes, but it is still an issue to look out for in the Standard Bank’s view.