Issue link: https://maltatoday.uberflip.com/i/1123240
30.05.19 4 NEWS Massimo Costa THE prevalent climate of un- certainty since the Brexit pro- cess started, and which esca- lated following eresa May's failure to win approval for her withdrawal deal, has lead to a decline in local demand for British Pound investments, a leading Maltese financial advi- sory firm said. In comments to Business- Today just before the United Kingdom's Prime Minister announced her intention to resign at Tory leader, Jesmond Mizzi, managing director of Jesmond Mizzi Financial Ad- visors Limited, said that the Maltese used to be avid inves- tors in Sterling, because of the high returns this offered, and the historical links between Malta and the UK. A diversification by investors into foreign currency, includ- ing the United States dollar and the British Pound, was an- other factor. However, Mizzi said that over recent years demand for Sterling has waned, particular- ly since the uncertainty over Brexit. "Today higher net worth cli- ents would tend to invest in Sterling given the present sit- uation and the higher poten- tial risk given the uncertainty," Mizzi said. Asked how the Brexit situa- tion will affect Maltese people who already have investment in Sterling, Mizzi said this all depended on the levels of un- certainty surrounding the is- sue as Brexit goes along. "By simply holding the cur- rency, one is already exposed to heightened potential vola- tility. However, it then all boils down to the type of investment one is invested in," he said. He noted that, should the im- pact on markets be a negative one, the following could be ex- perienced: • When it comes to bonds of UK corporates, these could decline in price and yields could go up. e de- fault probability increases depending on the geo- graphic area of trade. e greater the internal trade, the higher the risk and vice versa. e currency risk is in the hands of the inves- tor if the investment is de- nominated in GBP. • In the case of Collective In- vestment Schemes (funds), the decline in prices de- pends on the weighting of UK based investments within the respective funds. e more global, the better, for risk mitigation purposes. e currency risk is in the hands of the investor if the investment is denominated in GBP. • For GBP hedged Collec- tive Investment Schemes (funds), the decline in prices depends on the weighting of UK based in- vestments within the re- spective funds. e more global, the better, for risk mitigation purposes. In this case, the GBP curren- cy is hedged against the underlying fund's curren- cy and the downside risk is kept to a minimum. e exact opposite, however, is experienced if the GBP currency appreciates. "We do come across inves- tors having Sterling available for investments, and who per- haps are not that keen on con- verting to euro at this point in time, given the much awaited conclusion of the deal or no deal with the European Un- ion," Mizzi underscored. "If we look at interest rate levels should one opt to invest in some of the local banks, in- terest rate levels would vary between 2% and just over 3%, and obviously, locked in for a fixed term (five years)," he said, "Obviously, one could al- ways opt for other type of in- vestments, available through a broker, but investing directly (or indirectly) in international companies." "If one is seeking regular in- come return, one could poten- tially invest in UK Treasury Gilts or Sterling denominated bonds or bond funds which distribute income on a regu- lar basis. Investing in direct bonds would entail a client receiving a fixed rate of inter- est, and current yields on a 10- year Treasure Gilt (i.e. bonds issued by the UK government) are currently yielding just over 1%. Government backed bonds, such as treasury bonds are usually perceived as safe investments." "However, this does not mean that anyone investing such bonds would not experi- ence any fluctuations in capi- tal or inherent risks." "On the other hand, corpo- rate bonds (i.e. issued by com- panies) of Sterling denomina- tion and maturing in 10 years' time would yield investors an- ywhere between 1 to 5/6%, but subject to the credit quality of the bond being considered – that is, whether the company issuing the bond is considered to be of high quality (invest- ment grade quality) or of a high yielding nature (lower grade quality)," Mizzi added. Pound falls to near four- month low is week, the Pound fell to near-2019 lows following the outcome of the European elections last week, and after having been on a general de- cline for three weeks. XE.com quoted the Pound- to-euro exchange rate on Wednesday at 1.13, while the Pound-to-dollar rate stood at 1.26, hovering close to January lows. Market concerns related to the direction the Brexit pro- cess will take have been on the rise for a number of weeks, but these have escalated after May announced on Friday that she will resign as Conservative Party leader on 7 June. Her announcement triggered the start of the process for the successor who will take over as Britain's Prime Minister, and has opened up the possibili- ty that a hard Brexiteer could lead the UK government. Boris Johnson, considered the top contender to replace May, has said he would take the UK out of the EU with or without a deal come 31 Octo- ber. Further comPounding the uncertainty and complicating the Pound's outlook are the results of the European Parlia- ment elections, which saw the Brexit Party and UKIP collec- tively obtain almost 35% of the total vote. Newly formed and led by Eurosceptic Nigel Farage, the Brexit Party enjoyed a sweep- ing victory – which saw it win 29 seats – and has intensified the pressure for Britain the withdraw from the EU without a deal. In contrast, the Tory and Labour parties together only captured slightly over 23% of the vote, while the Liberal Democrats, Greens, Scottish National Party, Claid Cymru and Change UK – all of which support a second referendum – obtained just 40% of the to- tal. Following the humbling at the polls which left them with just four seats in Strasbourg, the Conservatives are headed towards a significantly harder stance on Brexit, and candi- dates competing for May's job are facing pressure to deliver a more clear-cut break from the EU when the UK is scheduled to leave at the end of October. In the case of a no-deal Brex- it, the Sterling is expected to fall as low as 0.97 against the euro and 1.15 against the dol- lar, the Financial Times re- ported. is political uncertainty, in- cluding that revolving around the question of who will be Britain's next leader, is expect- ed to remain elevated, leaving the Sterling in a difficult situ- ation. Local investment in British Pound wanes amid Brexit uncertainty e Maltese were avid investors in Pound Sterling, but the interest has lessened, particularly due to Brexit uncertainty, financial advisor Jesmond Mizzi says Financial advisor Jesmond Mizzi: "By simply holding the currency, one is already exposed to heightened potential volatility"