The British Pound (GBP) has already sunk to the lowest against the US Dollar of the past 10 years. It now looks to be trading at a price that is overvalued. So, what can be done to reverse this?
Actually, the fact that the United Kingdom has been enjoying strong growth for over a decade (and well into the future), despite Brexit, and is still widely viewed as a safe haven, mean that it has not had to deal with any major financial crises.
Therefore, when it comes to investing, this makes sense. If you are thinking about how to make a long term investment in the UK, then this is one area where you have probably already got it wrong. In this article, I will try to explain why the only real way to increase your wealth is to invest in the high interest UK government bonds.
Britain has always enjoyed a strong economy and its borrowing costs are at historically low levels, which mean that the British Pound is at an attractive discount. At current levels, a standard bond of similar maturity (ie. the first ten years) are trading at less than one tenth of the face value.
In contrast, the Euro has also recently dropped in value, but the only major nation to take this step, and therefore receive a ‘hard’ bailout, was Greece. Greece, although you might think, is still a stable nation. If you had invested in Greek bonds, then your losses would have been covered by the massive bailout money the EU handed out.
What is really interesting about this, is that the financial crisis, which was so crippling for the Eurozone, has not completely halted the economic recovery. But, it has been felt in almost all sectors. The only areas where the economic growth rate is still weak, are in sectors where it is difficult to diversify.
For example, the UK’s energy industry is an enormous, multi-trillion-pound industry, but it is also one of the sectors that, when taken separately, do not have much impact on economic growth. But, when you look at it as part of the UK economy, it is far more important. Therefore, it has been hit very badly and now suffers from a double whammy of falling commodity prices and the slowing economy.
The other thing I want to stress is that, whereas the credit crunch was indeed an outcome of the eurozone crisis, it was far worse than people realised at the time. The huge loss of wealth in the banking sector, which should have left it more resilient, was caused by the sudden reversal in the availability of cheap funds, which was caused by the ‘everything collapses’ financial event.
This means that the problems that the banks suffered from, were exacerbated by the fact that, because the biggest and most profitable financial institutions such as UK banks, had never before had to deal with such large scale funding problems, they were still able to borrow money at cheap rates. Consequently, these problems have not resulted in the collapse of the UK economy.
However, this is the other side of the story and, in order to profit from this crisis, we must be prepared to take the ‘bailout’ route. This will mean that the current state of the UK economy will remain for some time, despite the fact that it is heading towards recession.
The downside of this is that it will lead to even greater turmoil and the worst of the crash scenario is still possible. We are going to have to be prepared to accept lower growth levels, lower interest rates, higher unemployment and even increased inflation.
This will ultimately mean that we are headed for another recession, even though many people will continue to underestimate the extent of the problem because, by doing so, they are actually exacerbating it by continuing to base their decisions on financial markets. Even the Credit Crunch occurred in an already depressed market.
So, do not underestimate the importance of the UK economy and how important it is to your financial wellbeing. Please consider all this and think on it.
