Wry & Dry

Shopping in London getting cheaper

The Brits have a quaint way with words.  And it's not just about the names of those little villages, like Coddswallop or Little Bottom.  Or even street names in the capital, such as Threadneedle Street [1] or Cheapside [2].

It's also some of the more, well, worldly names.  Brexit, that newly minted portmanteau, is assured a place in the lexicon.   And then there's the UK currency, the delightfully sounding Sterling (or pound sterling) [3].  And the main index of stocks listed on the London Stock Exchange is the 'Footsie' i.e. FTSE 100 (Financial Times Stock Exchange 100 Index).

And now, because of Brexit, it seems that Sterling has cratered and the Footsie has boomed.  What's going on?

FTSE GBPThe FTSE is now just below its all time high, of April 2015.  As readers can see from the chart, the FTSE fell, as did Sterling, immediately after the Brexit vote.  And has since recovered.  The recovery has two sources.

Firstly, the recovery in commodity prices has pushed oil and resource stocks' prices higher.  Remember that companies such as Anglo American, BHP Billiton, BP, Glencore, Rio Tinto and Royal Dutch Shell are all resource companies.  And listed on the London Stock Exchange and are part of the FTSE100.    

Secondly, the weaker currency has made UK exports much cheaper.  That shirt that W&D might buy from a Jermyn Street tailor is now 20% cheaper than four months ago.  And the weak currency will lure tourists to London (the second most visited city in the world, after Hong Kong) and the rest of the country.  Although, as much as W&D gets annoyed by seeming busloads of camera toting German shoppers blocking Regent Street, inbound tourism is only 4% of the UK's exports.

W&D notes the merit of a sovereign currency.

So the obvious question is why has Sterling fallen?  The economic theory is that there will be less demand for British goods and services by members of the EU and hence less demand for pounds Sterling to pay for those goods and services.  Less demand for something means that its price should fall.

As Brexit itself is at least 2.5 years away that is certainly planning ahead.

Of course, foreign exchange traders have the foresight of a goldfish.  And that 2.5 years is about 2.4 years too far away to contemplate.  So the lads are simply punting Sterling. 

[1] Home of the Bank of England

[2] 120 Cheapside was the head-office of W&D's former employer, Schroders, back in 'the good old days'.  Then the cry for who should pay for lunch was, "let the Baron pay!", referring to Baron Bruno Schroder, whose family then had a controlling interest in Schroders PLC. And in those heady days, the Baron's deep wallet was often purloined by expense claims of 'lunch - various dealers'.

[3] Silver coins known as "sterlings" were issued in the Saxon kingdoms, 240 of them being minted from a pound of silver.