But what is clear is that having focused for so long on a paper trophy, he will have some adjustments to make now the edges have started to fray.
For many, the downgrading of the UK’s credit rating was in no real doubt: it was a question of when rather than if. So far only Moody’s has acted, but given the warnings issued by its fellow stooges (Standard & Poor’s and Fitch) last year they will surely not be too far behind with downgrades of their own.
In 2012 the weak medium-term growth outlook for the UK, the rating agency’s chief reason for the downgrade, was well-known. The difference was that investors could choose to ignore it. Now, however, there has to be a psychological shift because much like a poor school report, there is no denying what is set out in black and white.
The gradually weakening pound since the start of the year suggests the downgrade was already priced into forex trading, even if it wasn’t in the rallying stock market.
As I wrote last week though, investors would be foolish to put too much emphasis on the strength of the UK economy when it comes to potential returns from UK equities.
Investment ramifications
Thankfully a great number of UK companies derive a significant bulk of their earnings overseas and in such cases will benefit from a weaker pound. For these firms a sustained period of sterling weakness could boost reported profits and subsequent dividend payments as well.
Meanwhile, on the fixed income side, anyone worth his salt had recognised just how slim the chance of gilt yields dropping further was. Yet holders of gilts need not panic just yet, as the biggest buyer of UK government debt, the Bank of England, is not quitting the market any time soon.
At the fund level there has also been some movement towards currency hedging in the past few months. Schroders introduced sterling-hedged share classes on two Japanese and two European equity funds and other managers have spoken about mitigating currency risk within their strategies.
Stewart Cowley, head of fixed income and macro at Old Mutual Global Investors, says his Strategic Bond Fund has reached its lowest percentage of holdings in sterling for “quite some time” at less than 50%. Cazenove Capital’s head of multi-manager, Marcus Brookes, currently holds the significant cash position of his Diversity Fund in US dollars because he is bullish on the currency relative to the pound.
The only remaining argument for holding gilts now is in case of a return to risk aversion, in other words as a ‘safe haven’. But support for this must also wane since the weakness in sterling has the potential to drive inflation up still further in the guise of imported goods and services.
There are enough negative returns to be had in cash, which means this latest bump for the UK will provide yet more impetus for investors to move into riskier assets in the search for yield. Who can blame them?
