Investors’ first instinct, as they woke on Friday 24 June to news that the UK had voted for Brexit, was to sell shares. This didn’t feel remotely odd at the time. Sterling was plunging, the prime minister would resign by mid-morning and shares, in theory, are meant to be the asset you don’t want to own when there is a whiff of panic in the air.
Tough luck if you sold your FTSE 100 tracker fund on Monday 27 June, the day the index closed a shade below 6000 points. You’ve just missed a remarkable 1100-point run to 7074. The vote for Brexit created the best buying opportunity for years.
Or, rather, it was a golden chance if you are a sterling investor. As everybody knows by now, the single biggest factor fuelling the Footsie’s surge has been the weakness of the pound. Most of the gain reflects currency adjustments. The profits generated overseas by big UK-listed multinationals – BP, Shell, the crew of miners, the cigarette merchants, the pharmaceutical giants, HSBC, Unilever, etcetera – are worth more when converted back into sterling, the currency in which their shares are quoted. Calculated in terms of US dollars, the FTSE 100 has gone roughly sideways since the referendum.
GlaxoSmithKline illustrates the point. If you bought on the day of the referendum at £14.29, you’re up 18.7% with the share price now at £16.96. But if you are a US investor and bought the dollar-denominated American Depositary Receipts (each one represents two ordinary shares), it’s as if nothing has happened. The price of a Glaxo ADR has ticked up from $42.56 on referendum day to $43.30 on Tuesday – a gain of about 2%. It all depends on where you’re sitting.
Thus the sight of the Footsie above 7000 is the secondary story. Sterling’s slide to a 31-year low against the dollar is the main event, and the reason why chancellor Philip Hammond should stop saying, as he did again on Monday, that “the markets have calmed since the referendum vote.” Shares have calmed but sterling hasn’t. The currency still tends to slip on every indication from ministers that a “hard Brexit” is on the cards. Those pundits suggesting the pound could fall to $1.20 against the dollar, versus Tuesday’s $1.27, may be proved correct.
Yet Hammond would be right to claim that even $1.20 would not represent a crisis. In trade-weighted terms, the pound currently sits at a six-and-a-half-year low, which feels roughly the right level. First, the vote for Brexit has plainly created all the uncertainties that caused the IMF to cut its growth forecast for the UK next year to 1.1%. Second, the UK also needs to get its current account deficit under control and a weaker currency offers the best hope on that front. An overshoot on the low side would not be the worst problem for the UK economy to have.
That is true as long as a weaker pound doesn’t cause eruptions elsewhere. But, as matters stand, there are no signs of distress in bond markets, or even worries that a weaker currency will deliver a nasty dose of inflation. There’s still time, of course, and the risk rises the further the pound falls. But, right now, the UK can borrow for 10 years at a rate of 0.8%. That feels a very long way from crisis levels.
£40m payday for Jeremy and chums
Currency winds have also played a role in the entertaining scrap for SVG Capital, the quoted firm that invests in private equity funds. To recap: US fund HarbourVest Partners made a £1bn, or 650p-a-share, offer last month in what looked to be a smash-and-grab raid. HarbourVest declared its offer final, thereby ruling out improved terms, and invited quick acceptances.
Not so fast, said SVG, which had another look at its assets (most of which are euro and dollar denominated) and came up with a value of 735p a share, rather than the 666p it had offered the last time it spoke. Everyone is allowed to believe their investments are improving in value but the trick in a bid situation is to find someone prepared to agree – and then to pay up.
SVG has only half succeeded. Late in the day, it said on Tuesday that two other private equity investors, Pomona Capital and Pantheon Ventures, are willing to buy half the investment portfolio for £379m. That is still a discount to the book value for those assets, calculated at £401m, but, crucially, is a tighter discount than the one implied by the HarbourVest offer.
HarbourVest can protest that it is willing to buy all the investments, rather than half, and that SVG’s self-liquidation plan is riddled with uncertainties. Fair comment. But at least SVG’s board has given its shareholders a choice: they can have 650p for a quick sale to an opportunist bidder or they can take their chances on seeing 700p-ish via an orderly, but still brisk, liquidation.
Either outcome would represent a triumph for Jeremy Coller, whose Coller Capital outfit rescued SVG by injecting cash at 100p for a 20% stake in 2009. Coller Capital should make a sixfold-plus return from a punt taken in the depths of the financial crisis. And remember, in the fee-heavy private equity industry, the partners usually keep a fifth of the uplift for themselves. Call it a £40m payday for Jeremy and chums for riding the recovery.
