With limited company reporting in September, it is easy for investors to be distracted by politics. Headlines about turmoil grab attention. But investment judgement is assessing what risk share prices and a currency already reflect. In the three years since the Brexit referendum, the Pound has lost one-fifth of its value against the US Dollar. Is this a signal of worse to come, or does it mean there is value in British shares?
Stockmarket investors are often poor judges of politics and currencies. Even compounded over many years, a relative fall in the value of the British economy by anything like 20% remains unlikely. The weak Pound looks more like an indicator of sentiment, rather than a calculation of any likely real change in Britain’s prospects. Indeed, there are signs – with the Hong Kong bids for key assets such as Greene King and LSE – that there is opportunity in British assets. Apart from highlighting the value there might be in UK plc at a bargain level of the Pound, it also reminds us that even now there are some less politically stable places than the United Kingdom.
Many domestic service sectors are helped by an improvement in real wage growth and UK consumer spending power. The weak Pound adds an additional discount to the already depressed value of many British assets relative to historic norms. The gap might be closed by takeovers, or a resolution of Britain’s trading relationships. A short term shock is possible, but a government spending boost could smooth the UK exit. In time, it is likely that international investors will turn their attention to other world problems, and worry less about the UK.