Why The British Pound Matters

By Kathy Lien

On a historical basis, the British pound is extremely important. It is the oldest currency in the world that is still in continuous circulation.

There have been a lot of ups and downs in its 1,200-year history, but the pound, commonly known as sterling, is the fourth most actively traded currency behind the U.S. dollar, euro and Japanese Yen. With a well-developed English-speaking financial market, it has long been a popular investment destination. While the London Stock Exchange is only the world’s seventh largest, London is the world’s leading foreign exchange center with nearly double the daily foreign currency turnover as New York.

And foreign currency is easily the largest and most liquid market in the world.

Sterling’s Investment Impact

On a practical basis, however, sterling’s impact on investments depends on the percentage of sales that a company does in the U.K. If the amount is limited, say less than 15 percent, the rise and fall of sterling will only affect earnings in a minor way. However, if the company has significant business abroad in the U.K. – in excess of 30 percent for example – then a stronger pound will translate into higher earnings for the American business. A weaker currency on the other hand will reduce the value of U.K.-based earnings. So if you’re investing in a company with U.K. exposure, watching the currency is important.

Brexit Effect

Aside from the makeup of sales, the greatest impact that sterling and the U.K. economy have on the U.S. and other economies comes during times of instability. In June 2016, the U.K. voted to leave the European Union and since then they have been mired in Brexit uncertainty. This risk is expected to drag on for years to come and could have a real, potentially devastating impact on Britain’s economy as instability in U.K. markets translates into instability for the rest of the world.

If an unruly Brexit causes money to flock out of the U.K., we could see markets and sterling come tumbling lower. There could also be major stress for U.K. banks that would force the Bank of England to provide stimulus. London is the home to some of the largest banks in the world and in the worst case scenario, we could see U.K. bank failures with global repercussions.

If sterling crashes, the biggest beneficiaries will be the euro and U.S. dollar as investors escape into the safety of assets in the U.S. and continental Europe. From proximity alone, German, French and Eurozone investments would be the biggest beneficiaries of Britain’s plan to leave the European Union.

Fintech Could Be Hit Hard

But there’s one sector – fintech – that could be hit particularly hard by increased regulatory hurdles and the loss of EU trade benefits. Startups in this sector and many sectors for that matter may realize that it makes more sense to set up their offices in the EU over the U.K., which in the past had received major fintech investment. The bottom line is that Brexit is a serious issue that worries policymakers and business managers around the world, and while it is also a topical one, we expect it to haunt investors for years to come.

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.