UK investors will do better if they look to non Sterling assets as pound likely to remain unstable next year

Monday, 14 December 2009 11:14

Investing in non Sterling assets will protect UK based investors from a potentially destabilising fall in the pound next year and possible future inflation, according to a leading global asset management company.

Sterling has come under pressure in recent weeks on concerns about the gloomy domestic macroeconomic outlook, a ballooning public debt and a possible downgrade on Britain’s triple-A credit rating.

Although Moody’s Investors Service said earlier this week that the top sovereign credit ratings of Britain is not under threat of a downgrade right now, a worst case scenario foresees a cut by 2013. ‘The rise in debt and higher interest costs could test the ratings under some scenarios, but not right away,’ analysts said.

Election uncertainties are also weighing on the currency. An opinion poll showed last week Britain may have a hung parliament after national elections, which some economists say is a nightmare scenario. Financial markets fear the lack of a strong mandate for any party could make it difficult for the new government to tackle a budget deficit.

‘We have benefited from gaining a competitive advantage from weaker sterling but we could get out of control. If we do end up getting a hung parliament, the market will give up on having a financial discipline to get out of the debt problems,’ said Alan Brown, chief investment officer at Schroders.

‘If inflation is substantially local than global, investing out of home markets will give you an inflation hedge as the currency will come under pressure. That argues for non Sterling investment,’ he explained.

On general asset allocation for the next year, Brown said that he recommends investors move more towards equities from credit as investors anticipate the end of quantitative easing and the start of interest rate rises.

‘Easy money has been made and credit markets have behaved like equities. As we move out of recession into a recovery phase we expect to balance somewhat towards equities from credit. People will be thinking about when interest rates will rise and that's painful for bond markets,’ Brown said.