When we break down the financing of the UK current account deficit for 2018 an interesting trend becomes apparent – direct investment has declined to virtually zero, and the deficit was almost exclusively being funded by portfolio inflows.
With all of the uncertainty surrounding Brexit, the decline in direct investment is perhaps unsurprising. Direct investment is long term in nature, and there is little incentive to invest when political and economic uncertainty is so high.
But why would investors be pouring money into UK assets?
Digging deeper into the data reveals that actually this trend is being driven not by foreign investors but by domestic ones. As UK assets underperform their international counterparts, so UK funds have rebalanced and repatriated assets in order to keep asset allocations unchanged.
With the deadline for the UK’s withdrawal from the EU looming, the fact that the UK current account is being financed by potentially capricious portfolio flows raises the risk of an external shock to inflation.
David Hooker, senior portfolio manager, Insight Investment.