The Euro Elephant

The Euro Elephant

2 Sep 2017

Who is in the room containing those who are supposedly negotiating the terms of Britain’s exit from the EU? We seem to have sent a team of men (mostly) who are used to attending meetings without trousers which is perhaps appropriate.  The Europeans are fielding another team of men (mostly) who are seemingly permanently “flabbergasted” and like to talk about the conditions for talks about talks. Were they to remove their trousers you can be sure that they would be wearing a second pair underneath.

But what is that large white quadruped that keeps sticking its proboscis where it’s not wanted? It is the elephant in the room and its name is sadly not Donald the Tusk but Erich the Euro. Here is a picture of Erich, trumpeting towards his glorious target of parity with the pound (the chart runs from 2014 to this week – click to enlarge).



No one knows for sure why currencies move against other currencies. To listen to analysts and other commentators you might imagine that it is quite obvious, in retrospect if not in advance. This is largely tosh. The best answer is the one that I heard every day when I worked on the floor of the London stock exchange: “More buyers than sellers, mate”.


Looking at the elephant picture it appears that there have been more buyers of euros than sellers. In 2015 there were more sellers than buyers. Remind me, why was that again? There just were! Okay, okay.

I suppose that Brexit uncertainty and a slowing top-end property market (yes, they might be the same thing) have caused foreign investors to buy less sterling this year. You might just about persuade me that others have been buying euros in preparation for opening new offices in Budapest, Valletta and Clermont Ferrand.

But currency movements have real effects, though they take time to play out. There has been a 40% increase in UK tourists to Greece this year (doubtless fuelled partly by aversion to Turkey – people prefer oppressed governments to oppressive ones, it seems). As I write, these tourists will be asking themselves why Greece appears to have become as expensive as Switzerland (I’m exaggerating for effect here).

The Republic of Ireland is already seeing a significant decline in the value of food and drink exports to the UK (down by 8% in 2016) presumably due to sterling’s decline (food is a hand-to-mouth business in more ways than one).


The negotiators, whether trousered or debagged, can talk about trade deals (aka protectionism) and customs unions (aka protectionism) until the subsidised cows come home but nothing will change the fact that euro wholesale prices have risen by as much as 30% over the past two years. Investment decisions always follow the money in the end.

So how could this influence my own investments? I might be cautious about budget airlines and upbeat about pub and restaurant groups. The weak pound will encourage “staycation” but should also attract foreign tourists. My holdings in Greene King and Marston’s are as flat as proper beer and waiting patiently for a tourist-led boost. Both companies are quite sizeably indebted but cash flow is typically c.20% of revenues and they are still bravely pursuing “progressive” dividend policies: they yield 5.0% and 6.5% respectively. Beer and dividends – what’s not to like?


There seems to be a growing opinion that Britons will be buying more British food and there are signs of commitment to that idea. Morrisons says that it will only stock British meat in future. And this is what Cranswick, which supplies pork and sausages, had to say a few weeks ago.

The Group continues to invest heavily across its asset base to add capacity and capability and to ensure it can deliver high quality food products to its customers from modern, well-invested and efficient facilities.

During the period, further progress has been made on the new, purpose-built continental products factory in Bury, Greater Manchester, which will consolidate current production from the Group’s two existing facilities and provide substantial additional capacity to support future growth.

Ongoing investment in our pork processing facilities both at Preston near Hull and at the recently acquired Ballymena site in Northern Ireland will increase pig processing capacity and drive further operating efficiencies.

More British sausages – a Leave-voter’s dream.

But a serious point is that a perceived lack of foreign investment leaves a void and UK companies, which have typically reined in capital expenditure recently, might see opportunities and respond accordingly.


As for the EU countries, I suppose that a strong euro is one of the last things they need. Germany, France and Italy have vast unfunded state pension liabilities, ageing populations and low birth rates.

In 2010, France had 3.7 people of working age (16-64) for every one person over 64. In 2030 that ratio will be 2.3. Germany is worse (3.1 to 2.2) and Italy worse again (3.0 to 2.0). These countries probably need immigration to boost their economies but there is literally nowhere in Europe that manages a “replacement” birth rate (the Euro area average is 1.6) so immigration will need to be from the rest of the world.

A siege mentality and a strong currency will do nothing to help. 


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