There is no debt doom signal. And stop worrying about the pound, too

Not again… Just when the pound was off to a strong year, debt fears whack it anew. You know that drill. Rising 30-year gilt yields supposedly portend big Budget risks, with Britain reliant on the “kindness of strangers” to finance spending, but weak sterling suggests foreign investors aren’t keen, which bears claim will smash bonds and stocks alike.

Wrong. The bond markets’ move is global, not local, and no debt doom signal. More importantly, whichever way the pound swings has simply no bearing on stocks’ direction. None! Let me show you.

Whenever currencies rise or fall, abundant bearish fears erupt. Weak currencies stoke fears of costly imports and galloping inflation, a sentiment you have lived with since the Brexit vote. Strong currencies supposedly whack profits on exports, a fear now stalking Europe, or raise deflation risk, as Switzerland just argued when cutting rates back to zero. It all sounds sensibly bad.

Data disagree. Consider the pound’s history. While most will focus on the sterling/dollar exchange rate, that doesn’t capture the full picture. America is just 16.2pc of UK exports and 9.7pc of imports.

Broad exchange rate indices give a better view. The Bank of England’s Broad Sterling Effective Exchange Rate Index’s full-year data start from 1981. The FTSE All Share has risen in 34 years since then. Of those, the pound strengthened against the broad currency basket in 18. It weakened in 16 – a nearly even split. In the FTSE All Share’s nine down years? The pound strengthened in five and weakened in four. Again, a coin toss. Where is the bearish tilt?

Of course, for anything to be true, it should hold globally, not just locally. So, let’s also consider the dollar. US stocks rose in 44 of 56 calendar years since 1968. The dollar strengthened against a trade-weighted basket in 24 of the “up” years and weakened in 20. When stocks fell? The greenback rose six times and fell six times. Again, no pattern.

Even in shorter periods, no reliable relationship exists. Over the past 20 years, the weekly correlation between the pound and the FTSE All Share is -0.01. Since 1.00 means identical movement and -1.00 the exact opposite, this is exact randomness.

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Why is there no influence? Consider real basics. Stocks are shares in publicly traded companies’ future earnings. That’s it! Even for earnings, currency swings are basically neutral. Think it through. A weak pound may make UK auto factories’ or other facilities’ imported components more expensive, but it also makes UK exports cheaper overseas, letting companies seize market share and boost sales.

For firms selling into America, the pound’s weakness since the July 1 high versus the dollar helps offset those terrible tariffs. It all washes out. When the pound strengthens? Flip the scenario. Exports are costlier, but imported components are cheaper. Then, corporate leaders with overseas supply chains and customer bases are currency-hedging experts.

Much of today’s fear is really about the pound affecting inflation and debt, but these are also false fears. Everyone talked of Britain importing inflation from the weak pound in 2011, but the hotter consumer price index then was more about the rise in VAT. Inflation rates between the Brexit vote and the Covid lockdowns, when sterling was even weaker, were benign.

And debt? Long-term gilt yields have no more relationship with the pound than stocks do. The weekly correlation between sterling and much-maligned 30-year gilt yields is 0.01 over the last 20 years. Again, no relationship at all. After the Brexit vote sank sterling, 30-year gilt yields were routinely below 2pc.

Now, let’s flip it. Across the Channel, France is also freaking about borrowing costs, but the euro is “strong”. Bond yields are simply up in 2025 across the developed world, regardless of currencies’ swings. Connecting the two defies logic.

The truth about foreign investment flows is so simple few can see it. The UK runs perpetual trade deficits – everyone hates that. But trade deficits, always and everywhere, are an investment surplus. That is pure accounting, 100pc infallible (and something Donald Trump seemingly hasn’t ever learnt). Britain imports foreign capital constantly, much of which naturally makes its way to gilts. Demand remains there, regardless of currency wiggles.

Always remember: currencies trade in pairs. Eventually, over time, developed nations’ currencies balance out in what look like lake ripples. Since Black Wednesday, the pound sine-waves around tight ranges against most of them. They even out slowly – and will this time, too.

You don’t need me to tell you that a free-floating and sometimes falling pound was much better for Britain’s economy than clinging to an artificially strong exchange rate before September 1992. Some of the sterling’s weakest stretches were in the go-go 1990s.

So, let others worry over pound wiggles while you enjoy this global bull market.

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