Not everyone's scared about a Brexit vote in the Commons
LONDON: Some of the biggest money managers aren’t spooked by the prospect of a defeat of the United Kingdom’s Brexit divorce deal in Parliament.
Aberdeen Standard Investments, Allianz Global Investors and Investec Asset Management, which between them manage nearly US$1.5 trillion, are keeping long positions on sterling, even though British Prime Minister Theresa May looks set to lose a vote on her deal next week. They see lawmakers eventually acting to avoid the economic damage of crashing out of the European Union in March.
“The best route to agreement is by raising the probability of no deal,” said James Athey, a money manager at Aberdeen Standard, which oversees US$736bil and has bought the pound against the euro. “The second vote will be a lot closer to the deadline and thus likely sharpens the focus of many of those who voted against.”
With many of May’s own Conservative Party members against the agreement and opposition Labour planning to vote against it, the odds of passing it with 320 votes on Dec 11 look impossible. But various lawmakers have said there is no majority in Parliament for no deal either, raising market hopes it will pass on a second try or that a new Brexit referendum will be called.
An initial rejection by Parliament would be a signal for Investec portfolio manager Russell Silberston to add to his pound position. Strategists see the pound falling to US$1.25 if the deal is rejected, according to a Bloomberg survey.
“We are looking to buy on substantial weakness – hence if the vote fails and we get a big fall, then we would look to pick some more up,” Silberston said.
The pound is trading at around US$1.27 amid doubts about the Parliament vote, after surging above US$1.31 in early November as a Brexit deal looked set to be agreed. That leaves it down around 15% from its level before the 2016 Brexit referendum.
An analysis by the Bank of England saw the pound crashing another 25% to below parity with the dollar in a “disorderly” Brexit scenario. While the chances of that may be low, Aberdeen’s Athey said it was hard to have high conviction and there will be plenty of volatility, so he would only add to his position into a rally once the situation is resolved. And a big defeat for May’s deal could see him take his money off the table.
“If Theresa May loses the vote by 150 on Dec 11, I would have to seriously reconsider,” he said. “The market would take a second referendum as a positive and I think that might be a mistake, so I would maybe use that as an opportunity to exit.”
The pound surged nearly 1% on Tuesday after the EU’s top court indicated the United Kingdom could unilaterally reverse the Brexit process, before the currency erased its gains. The constantly changing scenarios are keeping Allianz money manager Kacper Brzezniak busy adjusting his outcome probabilities, while he holds a call option on the pound.
“That’s ultimately a long-term view, based on my belief that a no-deal will be avoided,” said Brzezniak. “It’s very difficult at this stage to have a fixed game plan.” — Bloomberg