Here’s an interesting tidbit on the sterling weakness front, courtesy of Citi analyst Michael Saunders.
Saunders has done a rundown of UK institutional investment (that’s by non-bank organisations like pension funds and life insurance companies) in the second-quarter of this year, and come up with an interesting view of the Bank of England’s quantitative easing policy. Here’s his commentary:
Institutional investment rose to £23.5bn in Q2 – highest since Q3-2007 — helped by higher retail inflows to unit trusts, as well as higher inflows to life assurance funds and pension funds.
Net purchases of gilts by UK institutional investors in Q2 were near zero, reflecting the lack of net gilt supply caused by the BoE’s huge gilt-buying programme. Net purchases of UK corporate securities (equities and bonds) by UK institutional investors rose to £4.3bn in Q2 – all in sterling bonds (with, again, net sales of UK equities) — from £3.2bn in Q1, helping to facilitate the rally in risk assets and rise in capital issuance. However, the biggest shift was into overseas assets.
UK institutional investors’ net purchases of overseas assets surged to £13.4bn in Q2 – third highest ever – from £2.0bn in Q1 and an average of £2.2bn per quarter in 2008. This reflected very big inflows into both foreign equities (£6.5bn) and foreign non-government bonds (£7.5bn). Net purchases of foreign corporate securities were far bigger than net purchases of UK corporate securities.
Thus, while the BoE’s massive QE programme may be producing some modest indirect boost to UK credit availability and UK corporate liquidity, it appears that much of this stimulus is flowing overseas. The most important effect of QE may be in helping to weaken sterling.
Related links:
FOREIGNERS ARE STEALING OUR QUANTITATIVE EASING – FT Alphaville
The upside of sterling’s slide – FT
Stephen King: The weak pound offers a quick fix but no long-term solution – Independent
On your marks, get set, devalue – FT Alphaville