How to protect your wealth from the weak pound
Jan 29, 2010
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It seems word is catching… "The UK is a must avoid. High debt with the potential to devalue its currency present high risks." - Bill Gross, Fund Manager, Pimco, quoted on Reuters, Tuesday
And it gets worse. Read this… "Growth is slow and inflation is rising, and weakness of the exchange rate has to happen. We are massively bearish on the pound." - Hans Redeker, Head of FX, BNP Paribas, speaking to Bloomberg, yesterday
I could go on with the quotes, but you get the picture.
The City hates UK PLC and a sell-off looms for the pound. The recent GDP numbers hardly helped matters. With official growth of 0.1%, the currency and bond markets were volatile.
At least we're out of recession though, right? I'm not so sure. Not to split hairs, but recessions are defined as two consecutive quarters of economic contraction. Surely recoveries should follow the same prudent guidelines. So while HM Treasury may celebrate, I reserve my judgement until we've seen another three months of expansion.
So, with the pound likely to flounder, what should you consider?
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- Why UK property prices are going to fall 50%
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AES Corporation (NYSE: AES) – AES is best known in the UK as the former owners of Drax. The infrastructure stock makes 68% of its money in emerging markets. On a forward yield of just 10 times earnings, though without any dividend, this stock still looks value for money. That must be why China Investment Corporation, the Chinese sovereign wealth fund, poured $1.58 billion into the Virginia-based power company for a 15% stake. AES says these transactions give the company the money needed to make some acquisitions.
Boeing (NYSE: BA) – The company is capturing headlines as quickly as it's capturing contracts. The media gaze was fixed on the maiden flight of the cutting-edge 787 Dreamliner. It's been delayed by two years, but thankfully the group finally delivered. The pilots described the flight as "a joy". And the display impressed a Vice President of All Nippon Airways, the jetliner's first customer. The Dreamliner promises fuel savings that make the model the company's most popular new plane ever, with 840 orders, worth around $140 billion.
Goldman Sachs (NYSE: GS) – Here's a suggestion for the more adventurous investor. According to Wall Street legend, Rochdale analyst Dick Bove, Goldman is "screaming to be bought." "Everybody is having a fit that trading activity has weakened in the 4th quarter. But it's seasonal. Nobody puts money to work in December and the net effect is a seasonal decline in trading and people are selling (Goldman) for that reason." In 2009, the stock market rewarded the brave. Could the same be true this year?
We've been here before.
Just 18 months ago, the same faces were making the same bearish prophecies about the pound. What followed was a 30% fall against the dollar and near parity against the euro. Don't let sterling's coming correction hit your portfolio this time around.
• This article
was written by Theo Casey, investment director of the Fleet Street Letter
, and was first published in the free daily investment email The Right Side
on 4 November 2009.
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