UK starts to feel the love

money-glitz | Victor Zhong 27 Sep 2021

With the British pound rising more than 7 percent against the greenback over the past year, investors are regaining confidence in the UK, after a pall hung over the country and valuations remained low in the wake of its exit from the European Union last year.

Overseas investors are now placing their bets on the UK, although its economy unexpectedly slowed to a crawl in July due to the Delta variant of Covid-19 spreading like wildfire after lockdown restrictions were eased.

Mom-and-pop investors in Hong Kong should look at the pound sterling as an investment with growth potential, say analysts.

Lloyd Chan, senior investment strategist of wealth management at Citibank Hong Kong, puts the pound at US$1.41 (HK$10.99) for the next three to 12 months.

Sterling dipped against the dollar on Friday, losing some of its gains from a rally which followed the Bank of England taking a hawkish tone on interest rates and its pandemic-era bond-buying.

Sterling remains around eight to ten percent cheaper, according to the real effective exchange rate, says Chan. The REER refers to the value of a currency against a weighted average of several foreign currencies.

RATE HIKES

Given the UK's superior vaccine rollout, Chan expects the Delta variant poses a little risk to a lower British pound.

"In our view, UK assets remain attractive from both valuation and post-Covid economic normalization angles," he tells The Standard.

OCBC Wing Hang economist Carie Li Ruofan also expects sterling to see a further upside as the currency has retraced some gains seen earlier this year.

The latest jobs and inflation data from the US both beat expectations, and this has raised expectations of a BoE rate hike in 2022, she says.

Should the labor market's improvement prove sustainable even after the furlough scheme expires at the end of September, it is possible for the BoE to further dial back the monetary stimulus measures. To that end, central bank dynamics may lend some support to the pound, Li adds.

Indeed, the BoE last week said the case for higher interest rates "appeared to have strengthened" after it nudged up its inflation forecast at the end of the year to over 4 percent, more than twice its target rate.

Still, the near-term upside of the pound may be capped by broad US dollar strength driven by risk-off sentiment and hawkish Fed expectations.

In Hong Kong, Nanyang Commercial Bank is offering as much as 12 percent interest on a 7-day pound time deposit while other banks are offering 10 percent or more.

But not everyone agrees that the pound is on the way up.

Ample Capital asset management director Alex Wong Kwok-ying does not suggest investing in the currency due to a "mild" long-term performance. He suggests the Australian dollar or euro over the sterling, depending on an investor's risk appetite.

Meanwhile, two US private equity funds - Clayton, Dubilier & Rice and Fortress Investment - are in a fight for Britain's fourth-largest grocer, Morrisons, reflecting private equity appetite for UK businesses.

Last month, Morrisons agreed to a 7 billion (HK$74.47 billion) offer from CD&R but the rival consortium led by Softbank-owned Fortress could still trump that bid.

Morrisons has now set an October 19 deadline for shareholders to vote on the hotly contested takeover proposal by CD&R.

However, investor confidence in UK assets has not fully recovered, Wong warns.

He points out that assets similar to Morrisons are chased by investors worldwide as the market realizes that traditional retailers have managed to stave off challenges from e-commerce giants such as Amazon.

Investors have been looking at US retailers such as Walmart, Target Corporation and Albertsons, giving them higher valuations over the last two years, says Wong.

Meanwhile, in another sign that overseas investors are casting their net the UK, the United Arab Emirates will invest 10 billion in the UK, targeting infrastructure, clean energy and technology over the coming years as the Gulf state seeks to strengthen trade ties beyond the Middle East.

The plans expand a Sovereign Investment Partnership between the two countries agreed on earlier this year. So far, more than 1.1 billion has been deployed since the partnership started, the sides said.

Investor interest extends to real estate in the UK, which has always been of interest to Hongkongers for the purposes of investment and emigration.

Wong says that home prices in the UK have been hovering at low levels due to the Brexit uncertainties, currency risks and tax hikes proposed by Prime Minister Boris Johnson.

Under Johnson's proposal, the rate of National Insurance payroll taxes paid by both workers and employers will rise by 1.25 percentage points, with the same increase also applied to the tax on shareholder dividends.

The measure is expected to raise as much as 12 billion a year.

In light of low housing prices, Wong says that UK assets are worth investing in, from a long-term perspective.

NOT THAT FAST

But the trigger point of revaluation remains out of sight, which means those who invest in the UK have to wait for a longer time to make a profit.

Wong says that he is more optimistic about property in tier-one cities of the UK, such as London, adding that the upside for second-tier properties is limited.

Home prices in the UK rose 2.1 percent in August, the second-biggest growth that was seen in the past 15 years after a fall the month before, with the stamp duty holiday coming to an end.

Property purchases slumped 0.6 percent in July when a year-long exemption from stamp duty on the first 500,000 of a house purchase ended in England and Northern Ireland, a measure to jump-start the housing market after the coronavirus lockdown last year.

But the average price of a home was 248,900 in August, up by nearly 25,000 from a year ago and higher than the maximum tax relief of 15,000 offered by the stamp duty holiday.

The tax break has been extended until September 30, during which time homebuyers won't have to pay stamp duty on the first 250,000, but this is now coming to an end.

So, for those investors who are willing to go the long haul, analysts say, UK assets are definitely worth looking at.

 



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