At a time when Bank of England Governor Mervyn King could use a weaker pound to boost the economy, investors from Japan to Norway are propping up sterling by purchasing more U.K. real estate than British citizens and the most stocks and bonds in over three years.
Foreigners are spending more on U.K. properties worth over 6 million pounds ($9.5 million) than residents are for the first time in a decade, according to Real Capital Analytics Inc. The most recent data on portfolio investments, which include purchases and sales of equities and debt, showed a 37.6 billion- pound net inflow in the second quarter, the biggest since 2009.
While King and Prime Minister David Cameron are leading an economy poised to contract on an annual basis for the first time in three years, foreign-exchange strategists see no weakness for sterling. That’s because international investors are flocking to the U.K. as a refuge from Europe’s debt turmoil, pushing the pound higher this year against the dollar, euro and yen.
“With the U.K. being in Europe but outside of the euro zone, it offers this safe haven to some extent when you look at property prices and markets,” Thomas Kressin, the Munich-based head of European foreign-exchange at Pacific Investment Management Co., which oversees $1.9 trillion, said by phone on Nov. 8. “That is one aspect that has been helping sterling.”
Buyers from abroad already increased acquisitions of British companies by 38 percent this year compared with 2011, to the most since 2008. GDF Suez SA (GSZ), Europe’s biggest utility by market value, paid 8.4 billion euros ($10.7 billion) for the 30 percent of International Power Plc it didn’t own in a deal completed in July. Hong Kong Exchanges & Clearing Ltd. is purchasing the London Metal Exchange for $2.2 billion, subject to approval from the U.K.’s regulators.
Overseas investors are adding to holdings of gilts for a 10th-straight year, according to monthly data on the Bank of England’s website.
Residential real estate is also hot. International investors accounted for 41 percent of London houses bought for at least 1 million pounds in September, pushing the cost of luxury homes to a record, according to property consultant firm Knight Frank LLP.
The pound was little changed at $1.5856 as of 2:15 p.m. in New York, having erased an intraday advance after the Bank of England cut its U.K. growth outlook and said the currency’s strength is undermining companies’ competitiveness. It’s still up 2.1 percent this year versus the greenback, and has climbed 4.2 percent from the 2012 low of $1.5235 set on Jan. 13. Sterling traded at 80.44 pence per euro, up 3.7 percent this year, and 127.48 yen.
“The U.K. will avoid the worst of the euro-zone crisis and the pound offers relative safety compared with the euro,” Nick Bennenbroek, the head of currency strategy in New York at Wells Fargo & Co., said in a phone interview on Nov. 12. “The pound has turned more resilient than it was earlier this year.”
While analysts say the U.K. and euro-region economies will shrink in 2012, they see Britain recovering at a faster pace in subsequent years. Gross domestic product will expand 1.1 percent next year and 1.8 percent in 2014, according to the median of analyst estimates compiled by Bloomberg. The euro area will grow 0.25 percent and 1.2 percent.
Hedge funds and other large speculators are betting sterling will extend its gains versus the dollar, a reversal from last year. The difference in the number of wagers on an advance in the pound compared with those on a drop stood at 19,279 contracts on Nov. 6, according to figures from the Commodity Futures Trading Commission in Washington. That compares with 47,092 wagers on a decline on Nov. 1, 2011.
Sterling strengthened even as King printed currency to buy 375 billion pounds of bonds, pushing down interest rates to spur growth. The policy helped cut Britain’s yields to record lows even as the fallout from Greece’s three-year-old financial crisis led Italian and Spanish borrowing costs to euro-era record highs.
Overseas investors spent 13.5 billion pounds on U.K. property through Oct. 12, compared with 9.3 billion pounds of domestic purchases, according to the data based on high-value deals compiled by Real Capital Analytics, a London-based real- estate research firm. If the trend continues, this will be the first year since at least 2001 when investments from abroad outpaced U.K. spending on the properties.
Norway’s $650 billion sovereign wealth fund spent 348 million pounds last month on a 50 percent stake in the Meadowhall Shopping Centre in Sheffield, northern England, where the Academy Award-nominated film “The Full Monty” was set. Two years ago, it also paid 448 million pounds for a 25 percent stake in London’s Regent Street.
“The U.K. has a large, well-established and liquid property market and will be important to the fund’s long-term real-estate investment,” Bunny Nooryani, the Oslo-based fund’s spokeswoman, said on Nov. 6 in an e-mailed response to questions.
The pension fund of Japanese chemical maker DIC Corp. said last month it’s seeking investments in British property as Japan’s real-estate market needs time to recover from a slump.
U.K. properties returned 7.6 percent annually in the last 10 years, according to an Investment Property Databank index. That compared with 3.2 percent in Germany and 7.9 percent in the U.S.
At One Hyde Park, the U.K.’s most expensive residency complex, an investor from Kazakhstan bought a four-bedroom apartment for more than 25 million pounds last month, according to company data. People from 25 countries own apartments there.
“I recently met one potential client who is a professor in Kuwait and I tried to extol the virtue of the U.K. property market,” Giles Beswick, a director at VitaStudent.com, a developer of accommodations for wealthy students, said by phone on Oct. 29. “He said ‘Look, you don’t have to convince me at all.’”
One of Vita’s projects in Liverpool, which provides hotel- standard rooms for students, was sold out in three months, Beswick said.
“If you look for medium- to long-term investment, bricks and mortar in the U.K. have a track record as being a safe investment,” he said “Sixty percent of our projects were bought by foreigners, mostly from the Middle East.”
While Britain’s economy emerged from a recession in the third quarter with the strongest growth in five years, Bank of England Deputy Governor Charles Bean cautioned the revival was “boosted by one-off factors,” including the Olympic Games.
Indexes of manufacturing and services dropped in October, and the economy will shrink 0.3 percent this year, the first contraction since 2009, according to the median estimate of 43 economists surveyed by Bloomberg News. Britain’s current-account deficit widened to a record 20.8 billion pounds in the second quarter, from 15.4 billion pounds in the previous three months, as companies earned less on foreign operations.
The Bank of England said in a quarterly report today it sees a risk of “persistent low growth.” The pound’s appreciation is “not a welcome development,” King said in a subsequent press conference.
“There’s ground for the pound to weaken over the coming months,” said Daragh Maher, a currency strategist at HSBC Holdings Plc. “Growth in general is still weak. The market is being quite patient, but the time will come when it will get a bit nervous about the budget outlook again.”
Public finances have weakened amid depressed tax revenues and increased welfare spending. The budget deficit in the first six months of the fiscal year started in April widened more than 4 percent to 65.1 billion pounds from 62.4 billion pounds a year earlier.
While the Bank of England said on Nov. 8 it doesn’t plan to buy more bonds, concluding a third round of so-called quantitative easing, further stimulus that would debase sterling can’t be ruled out, said Maher. He estimates sterling will weaken to 86 pence per euro by the second quarter, compared with the 79 pence median estimate of foreign-exchange analysts compiled by Bloomberg.
HSBC is in the minority, with the probability of the pound reaching its 86 pence per euro target at 8 percent, implied volatility from options trading shows.
Wells Fargo, the most-accurate currency forecaster in the six quarters ended Sept. 28, based on data compiled by Bloomberg, predicts the pound will strengthen to 78.5 pence per euro in the next six months and to 77.25 pence in 12 months, Bennenbroek said.
Currency strategists have increased their median year-end sterling forecast to $1.60, from this year’s low of $1.54 in July. The pound has gained 1.2 percent this year, according to Bloomberg Correlation Weighted Indexes, which track 10 developed-market currencies.
Acquisitions of U.K. companies by foreign investors increased to about $134 billion so far in 2012 from $97 billion in the whole of last year, according to data compiled by Bloomberg. U.K. companies spent about $72 billion on deals abroad, down 33 percent from $107 billion in 2011, the data show.
Foreign investors bought 16.8 billion pounds more U.K. government bonds than they sold in the three months through September, acquiring a net 9.8 billion pounds of the securities this year, according to Bank of England data.
“Sterling has been playing a safe-haven status within the context of Europe, while U.K. fundamentals have turned less negative,” Vassili Serebriakov, a strategist at BNP Paribas SA in New York, said in a phone interview on Nov. 12. BNP Paribas sees the pound at 74 pence per euro at end of 2013. “We are not looking for an extreme euro-zone scenario, but it’s clear the crisis is not going to be resolved overnight. Sterling is one of our preferred currencies and we see it outperforming the euro.”
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