UK challenges centred on currency, but future role as European hub is unclear
While the UK has faced short-term challenges over low
interest rates (relative to the US), the Brexit decision poses a threat to the long-term attractiveness of
the UK. Brexit is seen as a significant negative for UK investment, and investment sovereigns with European interests questioned the future of the UK as an ‘investment hub’ for Europe, given uncertainty over taxes on imports and market access. Liquidity sovereigns also noted their concern that demand for UK government bonds would drop, challenging the liquidity of their holdings.
Despite this negative sentiment, UK allocations remain relatively stable with stated declines likely linked to currency fluctuations rather than withdrawal, as demonstrated in figure 9. Furthermore, the fall in value of the pound has led to a rally in UK stocks as export-linked businesses benefit from more competitive pricing. The low value of the pound also allows UK asset managers to offer their services at a discount to international competitors. This low entry price into the UK represents an opportunity for UK managers who can demonstrate local market expertise and robust currency hedging processes to international sovereign investors.
There has also been a demonstration of ongoing sovereign commitment to long-term alternative investments in the UK. Many sovereigns noted that they were unlikely to cancel UK real estate assets in the near future and there have been several high-profile statements of renewed commitment to UK infrastructure investments following the Brexit decision, including Thames Water and Heathrow Airport. However, respondents noted that these are long-term investments which are unlikely to move until the outlook of the UK as a preferred investment destination (comparable to the US or Germany) becomes clearer.
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Mi 2016 M2017
Fig 9. Exchange rate, geographic allocations to the UK (% AUM)
GBP/USD exchange rate (External data)
Geographic allocations to the UK (% AUM) (Sovereign sample)
LHS: Source - XE currency data. Data as of beginning of given year. RHS: Sample is based on sovereign investors and excludes central banks. Data is not weighted by AUM. Sample: 2016=55, 2017=57.
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