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Currency: Sterling rallies - James Hickman, Caxton FX

Rallying pound will aid investment opportunities in Europe

As the global recession hit, UK investment in Europe quickly began to dry up. British consumers have been hit hard by the credit crunch and dreams of a second home on the French Riviera were among the first to be sidelined. Not least because the sterling cost of buying in Europe grew by 20% in just two months as the pound slid to record lows of near parity against the euro at the end of 2008. More recently however, investment opportunities have become more readily available with property prices on the continent remaining someway from their pre-recession highs, and the exchange rate making a significant recovery.

Currently the French and German property markets are tipped to be a good place to invest, as confidence in their markets has been given a boost by the recent announcement that they exited recession. The current low prices will inevitably begin to edge upwards in the wake of this news, which should support a return on property investment, as fears amongst buyers of further price falls begin to ebb away. Crucially the rate of exchange, which has been such a burden on European investment, does appear to be recovering. The pound had been held back in August by the Bank of England’s Monetary Policy Committee’s decision to extend quantitative easing by a further £50 billion, which put heavy selling pressure on the pound. However, more recently, data emerging from the UK economy, coupled with an easing of risk aversion and bullish equity markets, has supported sterling. Indeed some analysts have reversed their previous forecasts to suggest that the UK could well join other G7 nations in pulling free from recession in the third quarter.

Speculation

Such speculation has aided the pound and will continue to do so should the MPC on Thursday follow this favourable trend in commenting more positively on the UK’s economic progress. The combined economic forces of a more favourable rate of exchange, lower prices, and a recovering Eurozone economy could encourage demand from UK buyers who will be eager to take advantage of favourable investment opportunities.

However, one popular British destination that may continue to suffer from a lack of foreign investment is Spain where the spectacular burst in the property bubble may continue to hamper buyers. Recent data from the National Institute of Statistics show that new property sales were down 18% compared with June 2008, while re-sale property prices were down 33%. Although there are signs that the rate of decline is beginning to slow, clearly the market is still extremely fragile and the rate of exchange may have to improve significantly before UK investors are encouraged en-masse to return to Spanish property.

James Hickman

James Hickman is Managing Director of Caxton FX, a currency exchange specialist based in London www.caxtonfx.com

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