Capital Letter Magazine
Capital Letter Magazine produced by the British Business Group of Abu Dhabi (BBG) and distributed to its membership, key business centres in the United Arab Emirates and the United Kingdom Houses of Parliament, published an article written by our Managing Partner, Zahir Moghal. The article was written in mid-September and published in the magazine’s October 2016 issue. Please note the article was based on the events before Theresa May’s statement on Article 50 which was announced on the 6th October 2016 and caused the GBP flash crash. By: Zahir Moghal On the morning of 24th June, 2016, the world awakened to find the ‘Leave’ campaign had won by a vote of 52% to 48%. The ballot sent shockwaves across the world with the Pound (GBP) falling to the lowest levels since 1985. Markets dislike uncertainty, but this is likely to continue for some time to come as no clear path for Brexit has yet been agreed. The British economy seems to have survived the first shock of the Brexit ballot, even though sterling continues to show little signs of recovering from its sudden fall. The UK’s AAA credit rating was downgraded to AA. But views are divided over the long-term effects of exiting the EU, with higher import costs being balanced by cheaper exports. In contrast, share prices have picked up from a dramatic crash in value, with both the FTSE 100 and FTSE 250 index trading higher than before the referendum. Several UK exporters announced increased orders due to a favourable exchange rate. Focusing on the local exchange rate, the GBP against the Dirham has fallen by 20% now being worth AED4.80 compared to AED6 two years ago. A major factor for GBP’s continuing weakness is due to the Bank of England cutting interest rates on 4th August from 0.5% to 0.25% and applying additional quantitative easing. This is the first reduction in the cost of borrowing in the last seven years, bringing UK rates to a record low. The Bank of England has also stated it intends to carry out a significant extension of its quantitative easing by injecting a further £70 billion into the UK economy. In spite of the negative short term outlook for UK economy and a possible recession on the horizon, the view from this region is that it could be beneficial in many ways. British expats are seeing AED earnings now worth 20% more when translated into Sterling. There has also been increased activity by companies and individuals looking to benefit from these 30-year lows by fixing rates for another year. Investment in the UK from the UAE is rarely done to access the EU market, so any future trade agreement between EU and the GCC has little effect on GCC investment in the UK. The drop in the GBP should make the GCC investors more attracted than ever to buying UK products and investing in business and private assets. In the long term we expect the GBP to strengthen once the uncertainty of the path out of Europe for the UK is clearer. For instance, our British expat private clients who are regularly sending AED 20,000 home as savings every month have earned an additional £5,850 in the year by fixing a forward rate now. The same is, of course, true for clients who are buying property in the UK. Managing one’s foreign exchange exposure effectively can result in significant savings. For the full magazine please click the link below: http://www.britishbusiness.org/pdf/capital_letter/CL%20MAGAZINE%20OCT%20web%202016.pdf For today’s market update 13th Oct 2016 please click the link below: http://delma-exchange.com/news/markets-brace-themselves-for-possible-us-interest-rate-increasePost-Referendum Benefits for Money Transfers
