Pound drops to lowest level since 1985 — and U.K. stocks soar
The British pound has hit a 31-year low against the dollar amid concern the country is willing to break away definitively from the European Union’s common market.
But the country’s stocks are loving it, with the main index closing in on a record high.
The pound, which traded around $1.50 on the day of the June 23 vote to leave the EU, was at $1.2749 on Tuesday, down 0.8% on the day, after comments from Prime Minister Theresa May.
That’s its lowest level since June 1985, when Margaret Thatcher was British prime minister and London was readying for Live Aid.
The pound’s descent means the country is less well-off — anyone who goes on holiday to the United States or Europe would have less money to spend. As well as falling against the dollar, the pound is also at five-year lows against the euro, according to financial information provider FactSet.
However, the pound’s drop is potentially good news for one part of the British economy, its exporters and multinationals, which are heavily represented in the main stock index.
Exporters will see their goods become more cost competitive in international marketplaces, especially while the country remains within the EU. And the money they make abroad will be worth more when it is brought back to the headquarters in the U.K.
Fashion house Burberry, which sells heavily in the U.S., Europe and Asia, has recently said its earnings have been boosted by the fall in the pound while warning of challenging times ahead.
Pearson, the education publisher, makes a lot of its money in dollars, and was one of the top risers on Tuesday. It’s the same for miners and oil firms like BP and Royal Dutch Shell, whose products are denominated in dollars.
The stock index is up another 1.8% Tuesday at a high for the year of 7,119. That’s just shy of the all-time intraday record of 7,122, which it touched briefly on April 27, 2015.
“The reality is the biggest stocks in the index dominate its performance, and the likes of HSBC, Royal Dutch Shell and British American Tobacco all have international earnings which are now worth more in pounds and pence thanks to (the pound’s) decline,” said Laith Khalaf, senior analyst at Hargreaves Lansdown.
It’s not just the big exporters seeing a rise in their shares this week. Even smaller British companies focused on the local economy are gaining thanks to recent upbeat economic indicators and the central bank’s recent move to cut interest rates.
That’s a marked change from earlier this summer, when domestically focused companies were seeing their shares dive on concern about the economic outlook.
The latest drop in the pound came Monday in the wake of the comments by May, who replaced David Cameron as prime minister in July.
She fleshed out some details over how the country will leave the EU, saying she will invoke by March the so-called Article 50 of the EU treaty — the move that will officially start two years of talks on Britain’s exit.
She also appeared to signal that her government would prioritize controls on immigration over access to the European single market, an approach informally called a “hard Brexit.”
It remains unclear, however, what the negotiations will ultimately bring for the British economy.
“The truth around Article 50 and a ‘hard Brexit’ is that nobody really has any idea what the outcome or repercussions will be,” said James Hughes, chief market analyst at GKFX.
“So for the markets, it is the utter uncertainty that is causing the volatility and downside movement for the pound, and not any kind of factual information or informed guess work.”
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