November 15, 2017 / 5:25 PM / a year ago

Trade sterling like emerging market currency, say investors

LONDON (Reuters) - The pound should be traded like the currency of an emerging-market country, money managers at the 2018 Reuters Global Investment Summit said on Wednesday, because of uncertainty surrounding Brexit.

UK pound coins plunge into water in this illustration picture, October 26, 2017. Picture taken October 26, 2017. REUTERS/Dado Ruvic/Illustration

Portfolio managers told the summit that high levels of political risk, a hefty current account deficit, and high levels of debt made Britain appear more like an developing economy than an advanced one, and trading its currency should therefore reflect that.

“If you look at sterling though an emerging-market (EM) prism it’s a screaming sell,” said Paul McNamara, an investment director at GAM, a fund management firm which manages 184 billion Swiss francs ($186 billion) in assets globally.

“If you take an EM-style analysis to the UK, it looks pretty horrible.”

Sterling has fallen almost 13 percent on a trade-weighted basis GBP= since Britain voted in June 2016 to leave the European Union, and is not expected to recover while uncertainty remains over what kind of divorce deal emerges.

As well as keeping the currency under pressure, that political uncertainty has made sterling vulnerable to bouts of volatility, mainly on worries that Britain could opt for a “hard” Brexit in which it loses any kind of preferential access to Europe’s single market.

“What we tend to do is if sterling volatility starts to pick up ... is we reduce sterling exposure. And when the volatility calms down again we close our position,” Royal London Asset Management’s head of multi-asset Trevor Greetham, told the summit.

Realised volatility in sterling has picked up in recent weeks with daily market swings rising markedly from earlier this year.

“So we’re trading between slightly underweight and more underweight depending on the volatility picture, which is a technique that actually comes from emerging-market currency trading,” he added.

Greetham said he did not rule out a “reversal of Brexit” if public opinion were to swing against a departure, giving that outcome around a 10 percent chance.

Earlier in the week, Northern Trust Asset Management told the summit the pound could relapse by almost 10 percent to as low as $1.20-$1.22 if a “no deal” Brexit became likely.

JP Morgan Asset Management offered a more positive assessment, saying it had gone “modestly long” on the currency three or four weeks ago.

Nick Gartside, the firm’s London-based international CIO for fixed income currencies and commodities, said risks to economic growth in Britain were tilted to the upside given robust global growth.

And even in "the very worst-case scenario" of Brexit negotiations, he said, sterling would only slip to the $1.20s - a modest fall from current trading levels around $1.31 GBP=D3.

($1 = 0.9896 Swiss francs)

Reporting by Jemima Kelly; Additional reporting by Ritvik Carvalho and Saikat Chatterjee; editing by John Stonestreet

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