A Bank of England data series* measuring the impact of “external and foreign currency flows” on the M4 money supply suggests that investors have moved funds out of the UK and / or sterling since late 2015, probably because of the EU referendum.
The numbers are highly volatile on a monthly basis but show an outflow of £77 billion in the six months to April, up from £2 billion in the previous half-year and the largest since 2012 – see chart.
The item “external and foreign currency flows”, or equivalently “monetary financial institutions’ (MFI) externals”, measures the combined change in the banking system’s net external asset position and its net foreign currency lending to UK non-banks. The change in net external assets, as a matter of accountancy, equals the sum of the balance of payments current account and the capital account of UK non-banks. A fall in net external assets, therefore, indicates a deficit on the current and non-bank capital accounts.
A fall in banks’ net foreign currency lending to UK non-banks, meanwhile, implies that non-banks have reduced their exposure to a decline in sterling.
The current account deficit was £33 billion in the fourth quarter of 2015. Assuming that it has remained stable, the implied shortfall over six months is £66 billion – below the £77 billion external and foreign currency outflow in the six months to April. This suggests that the non-bank capital account moved into deficit over this period and / or UK non-banks cut their net foreign currency borrowing from UK banks.
The claim that foreigner investors have reduced their exposure to the UK is supported by the May Bank of America / Merrill Lynch global fund manager survey, showing a net 36% of asset allocators underweight UK equities – the largest negative balance since November 2008.
*Bankstats Table 3.2, series identifier VRIG or ABVW.
