The weakened pound: What does it all mean?

So, rather unhelpfully, when young investors ask their elders and betters why the price of a share has gone down, they are often met with the answer “more sellers than buyers”.

That has been a pretty accurate summary of the state of the pound in international markets, as sellers have found it harder than usual to attract bids.

Ordinarily, when a currency falls it becomes more valuable to overseas investors.

They can buy more of that economy’s domestic produce with their own stronger currency.

Something a bit unusual has happened recently.

Bond yields have been rising, yet the pound has continued to fall.

This is akin to the kind of currency movements we see when markets lose confidence in Governments and economies.

This is not a currency crisis, because the UK doesn’t have a fixed exchange rate.

A currency crisis occurs when a Government is unable to maintain its fixed exchange rate because it runs out of currency reserves.

However, it is important for the UK because for many decades the economy has relied upon an ever-increasing amount of foreign capital.

Uncertainty or despondency about the UK’s trading relationship with Europe may have triggered a change in sentiment about the UK as a place to invest.

What does this mean for investors?

A lower pound means higher costs for companies that buy their goods overseas and sell them to UK consumers.

That means retailers are losers as the pound falls and companies like housebuilders could also eventually underperform.

Smaller companies tend to be more exposed to the UK economy than large companies so we have seen a disparity in performance on this basis.

On the flipside, a weaker pound means any sales, which take place abroad, are worth more in sterling.

Beverage and food producing companies are often well placed to benefit from this.

What could it mean for the economy?

The UK, for all its economic faults, has been one of the stronger economies in the post-financial crisis era.

But it has an underlying fragility, which successive Governments have been unable to address.

UK consumption is effectively based upon borrowing, for which the lending has come from overseas.

If overseas investors do not see the attractions of lending to, or investing in, the UK then the economy will suffer from a sudden debilitating lack of credit.

By way of example, the UK Government borrows funds equal to around four per cent of GDP each year, and overseas investors make a net investment in the UK of around five per cent of GDP.

Without that foreign financing of our Government spending the UK would seem destined to suffer a sharp recession.

If foreign savers don’t wish to invest in our financial industry or build factories, then UK Government spending will have to be cut aggressively.

If the abrupt change in Government policy spooks investors enough we might see higher inflation, higher interest rates and recession.

Could the pound bounce back?

If all this seems somewhat apocalyptic and pessimistic, it is worth mentioning it is not what we expect to happen.

It would be very unusual for a developed economy with an independent and credible central bank to lose the confidence of the markets.

This is the kind of thing that happens to emerging markets.

The pound has fallen in value but it is not yet at an extreme level.

We see a nearly 70 per cent chance of appreciation from this level and a 20 per cent chance of it at least stabilising.

At its current level, the pound could help to rebalance the economy away from financial services.

However, the Government needs to support or at least avoid hindering that re-balancing.

Securing a positive working settlement for the UK’s chief export industry, financial services, is still important as the UK does not have alternative export industries that are ready to replace what would be lost.

Export industries first need to grow, find distribution channels in new and untapped export markets and then out-compete the incumbents.

None of these tasks are remotely easy, so while it is a frustration to some that we cannot establish new trade deals with overseas territories until after our departure from the EU, it would be unwise to think that hastening that departure would be anything other than extremely detrimental.

Oliver York is a trainee investment manager at wealth management firm, Brewin Dolphin, in Newcastle.

The opinions expressed in this article are not necessarily the views held throughout Brewin Dolphin. No director, representative or employee of Brewin Dolphin accepts liability for any direct or consequential loss arising from the use of this document or its contents. Any tax allowances or thresholds mentioned are based on personal circumstances and current legislation which is subject to change.