Sovereign Leadership’s Leahy: Carney – the arrival of the cavalry or the Grim Reaper?


I’m referring of course to the Canadian who will soon be arriving to run our finances in his role as the next governor of the Bank of England. Given the current turbulent state of the markets, should we be worried?

Mark Carney is currently the poster boy of central banking, blessed with James Bond looks and a stellar track record. But what we don’t know enough about is what UK investors should expect when his plane touches down from Ottawa.

He left Canada last weekend as the only G7 central banker in a position to even mention re-applying the brakes – meanwhile his US, Japanese, UK and EU colleagues are scratching their heads over how to rekindle growth.

Talking Japanese
What do we know? A number of commentators believe he’ll want to do a Japan-style ‘talking down’ of the British pound alongside the ‘talking-up’ of inflation that goes with it.

He’s also made recent comments that central banks aren’t “maxed out” on the tools available to them. This comment has fuelled bets he’ll favour a stimulus approach that weakens the currency in the interests of boosting Britain’s economy.

On the currency market, the cost of options on the pound vs dollar exchange rate is rising. This is usually a tell-tale sign that investors and those with pound/dollar exposures are looking for insurance – and the recent performance of the dollar suggests it’s not that currency they feel needs to be hedged against!

Equity and bond markets
What about the stock market? Well according to Credit Suisse strategists, Carney’s arrival is expected push up inflation expectations, drive down real yields, making bonds even less attractive and lift the FTSE even further.

It’s worth remembering that as the FTSE 100 is so heavily weighted with foreign and multinational companies, it offers something of a hedge against the pound for British-based investors – the earnings of the foreign and multinational companies will be worth more when converted into devalued pounds.

Moving onto UK bonds – Carney never really showed convincing signs of caring greatly for bondholders during his five-year tenure in Ottawa. During this period, Canadian sovereign bonds performed poorly. Their returns ranked 20 out of 26 major countries – markets that fared worse include Greece, Portugal, Spain and Japan, not great bedfellows.

Carney may feel he needs to care even less about UK bondholders than he did in Ottawa. The larger UK economy has far more debt than Canada – but importantly much less of it needs to be refinanced in the next few years.

£80bn refinancing bill
About £80bn in principal and interest has to be refinanced in the remainder of this year. But with Canada needing to find twice as much as the UK, they need to be twice as nice to the bond market ‘bank manager’ than we do.

Credit Suisse last week advised clients to remain overweight on UK equities, driven by “a recovery in employment and housing even before there is more monetary stimulus”.

So UK equities are garnering some support. However some economic ‘green shoots’ would be warmly welcomed by investors – currently they’re faced with buying artificially inflated equities simply because they are the ‘least worst’ choice available.

Peter Leahy is managing director at financial services training provider Sovereign Leadership Group