Investors bet on recovery in the value of sterling
SOME OF the world’s biggest investors are betting on a sustained recovery in the pound, confident that Britain will avoid a disorderly crash out of the European Union.
They also believe that the Bank of England will raise interest rates over the coming months.
Bets on the pound show a sharp reversal in sentiment towards sterling. Just a few months ago, the risk of a “hard Brexit” under which Britain retains no preferential access to the EU’s single market was seen as likely.
However, the pound’s rally in recent months has forced many hedge funds to unwind their positions and to buy into the recovery.
The pound is on track for its best month against the dollar since 2009.
BlackRock, the world’s biggest investment manager, has raised a long sterling position by five times over the past year.
Investors such as State Street have also bought sterling in recent months.
Marilyn Watson, head of the global fundamental bond product strategy team at BlackRock, said: “We thought a lot of bad news was priced in for sterling and the downside risks were asymmetrically priced.
“Over the past few months we have significantly increased our position.
“When you look at the UK economy, it is on a lower trajectory than what it was before but still healthy. The market is pricing one hike but I think they can hike a couple of more times.”
The slump in the pound in 2016 came to symbolise the economic loss that many predict Britain’s departure from the EU will trigger. While exporters have benefited, British tourists have seen their cash squeezed and UK inflation has topped 3 per cent.
James Binny, global head of currency at State Street Global Advisors, said: “While Brexit concerns remain in the short term, we think sterling is still undervalued despite the recent run.”
But many investors warn that uncertainty over the shape of Britain’s future relationship with the EU is making them cautious about the rally. UBS Wealth Management lifted its three-month sterling/dollar forecast to $1.40 from $1.36 this week, while keeping the 12-month forecast at $1.36.
The pound’s performance also reflects a broad sell-off in the dollar, now languishing at a threeyear low against the euro, rather than improvements in Britain’s prospects.
The pound has gained a fifth from a 2017 low below $1.20 last January but is still some way off a pre-Brexit vote high of around $1.50.
Against the euro, perhaps a better barometer of Brexit-related risk, it strengthened this week below 87p, its highest since June but still far below the sub-80p levels before the referendum.
Tepid British indicators point to an economy that is struggling despite a global boom, with the International Monetary Fund predicting 2018 growth of 1.5 per cent, less than half the global rate.