Sterling guesswork as financial sector calculates Brexit effect
Asenior director at one of the UK’s large banks, when pressed to estimate privately how far sterling would fall against the dollar on Friday if Britons vote for Brexit on Thursday, guessed at 10%. Then he quickly recalculated. No, 10% was too much. He’d never seen a one-day movement in sterling of remotely that size. It would be closer to 5%.
That game of guesswork was played at the end of last week. On Monday, one suspects, 10% wouldn’t sound so fanciful. Since last Friday’s low, the pound has risen 4% against the dollar and Monday’s surge was the biggest one-day gain since 2008. This happened on nothing more than a shift in the opinion polls towards remain, even though those same polls still show the outcome as being too close to call.
If Brexit is the result, that freshly acquired 4% would be removed in a flash, one assumes. Then one might add the same fall again – or probably more – to reflect the fact of a leave victory. Suddenly, sterling at $1.30, versus $1.47 currently, almost becomes a par score after a Brexit vote.
The great speculator George Soros, writing in this paper, reckons the drop would be steeper, to below $1.15. That may sound alarmist, but who can say he is wrong? Even Capital Economics, which argues that talk of Brexit triggering recession in the UK is overdone, thinks a vote for leave could push sterling to $1.20.
In the circumstances, it’s hard to understand why sterling managed to regain so much ground on Monday and trade at its highest level since January. Anybody with a “long” exposure to the pound that runs beyond the next few days will have three points to consider.
First, there is the possibility of substantial losses on Friday. Second, even a close victory for remain – say 52%-48% – might not be received cheerfully by financial markets; the vote wouldn’t settle the EU question for a generation and the two wings of the Conservative party would be at loggerheads all the way until the general election in 2020. Third, the medium-term trend for sterling is probably lower anyway since the UK needs a weaker currency to repair its current account deficit, which reached a peacetime record of 5% in 2015.
Share prices after a Brexit vote are a different matter since the FTSE 100 indexes is populated with so many companies that earn the bulk of their profits in dollars. But, on the evidence of the past few days, the potential exists for truly enormous moves in currency markets.
The bank executive’s prime concern was to ensure that computer algorithms – set to trigger buy and sell at certain levels – don’t add to the confusion by executing orders at silly prices, for the bank or for its clients. That sounds a wise precaution: in currency markets, there is the possibility of mayhem.
TalkTalk’s bonus question
It’s jolly sporting, of course, for TalkTalk chief executive Baroness Harding to donate her £220,000 bonus (part of a £2.8m pay package) to charity but shareholders may wonder why she was awarded the sum in the first place.
Yes, the pay committee used its discretion to cut the bonus from £343,000 “in the context of the cyber-attack on TalkTalk”, which infuriated customers whose personal data was snatched. And, yes, the award obeyed with the pay principles approved by shareholders.
Yet there is a glaring oddity in the profit-related element of the bonus. TalkTalk looks at “headline” ebitda (earnings before interest, tax, depreciation and amortisation) when calculating a quarter of the bonus pot. On that basis, earnings improved from £245m to £260m, which the committee regarded as an achievement “between minimum and target”.
But look at what the “headline” figure excludes. It ignores the cyber-attack last October that caused £42m to be booked as exceptional charges. Include the exceptionals – which, bafflingly, also include a cost-cutting programme lasting three years (so not really exceptional, but more like regular business) – and ebitda fell from £199m to £177m. That, one presumes, would have yielded no bonus on the profit-related scoring system.
Indeed, at a pre-tax level, TalkTalk’s profits more than halved to £14m last year. Forget the “headline ebitda” gymnastics. Harding could not have complained if her annual bonus had been zero.
Costly decisions at BHS
It’s astonishing. A week before he paid £1 for BHS, Dominic Chappell was being told by Olswang, his own advisers, that he might be on the hook for the full deficit in the pension fund; that the hole could be £500m; that a full actuarial valuation was not available; and that the fund’s trustees might object to a sale, or demand more cash upfront. Chappell went ahead with the purchase anyway. It was an absurd decision.
The buyer’s optimism-cum-idiocy does not, of course, remove Sir Philip Green’s responsibilities to pensioners. Green told parliament last week that he always knew he would be part of resolving the pension mess and was not seeking to run away. Good; now let’s see the money.