After the collapse of Northern Rock five years ago investors found it difficult to love the pound. The global financial crisis, the nationalisation of two other British banks, the recession and the protracted UK property downturn continued to discourage investors during most of the last five years. In recent months there have been signs that this antipathy is turning to grudging respect for the pound. It could be that the change of heart coincides with an upturn in UK real estate, traditionally a safe and profitable home for overseas investors’ cash.
In mid-April Rightmove reported an all-time high for its index of asking prices, 0.5% up from the previous peak in May 2008. More convincingly, property analyst Hometrack saw prices rising for a second successive month. Turnover was up, as was the achieved percentage of the asking price – 93.1% in April. At the end of the month the Bank of England’s trade weighted index put sterling at its strongest since August 2009 and the pound touched a three-and-a-half-year high against the euro. Whilst there can be no assumption of cause-and-effect, sentiment in both areas is clearly improving. That was emphasised when figures for the first quarter of 2012 showed negative output growth of -0.2%, meaning a return to recession for the UK economy: Investors hardly flinched at the news and the pound ended the day higher than it had begun.
Investors have a great dislike of losing their money, a risk they see looming large in Euroland. Spain is in the spotlight once more as austerity pushes the prospect of economic expansion yet further beyond the horizon. With a quarter of the workforce unemployed and half of all young people unable to get a job there is growing pressure to re-examine the logic of chasing growth through self-imposed recession. Even the European Central Bank president has called for a euro zone “growth compact” as an antidote to Chancellor Merkel’s “fiscal compact”.
It would of course be an absurd exaggeration to describe sterling as a rising star, let alone new. Even so, the recent change in sentiment towards the pound suggests it could have further to go.
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