Stress Over Brexit Will Make a Volatile Pound a Bargain

(Bloomberg) -- Investors should snap up the pound when it slides on Brexit if they are brave enough to handle months of volatility, according to UBS Wealth Management.

The private banking arm of UBS Group AG -- which counts many of the world’s billionaires among its clients --- reckons that below $1.20 is the magic number, as even a “hard Brexit” should not see the currency fall much further. That would be a 7 percent drop from current levels.

Stress Over Brexit Will Make a Volatile Pound a Bargain

“The message is that based on long term valuations sterling is undervalued,” said Geoffrey Yu, head of its U.K. investment office. “Ultimately when you do have valuation extremes the natural buyers will come back in.”

The currency saw wild swings in the past week as Prime Minister Theresa May faced ministerial resignations and lawmaker challenges after reaching a draft Brexit deal with Brussels. Any prolonged political uncertainty could push the currency lower from here, Yu said.

If May fails to get her deal through Parliament, the currency could fall to $1.20, according to strategists at banks including Credit Agricole SA and MUFG. Sterling last fell below $1.20 in October 2016, when it lost 6 percent in just one minute.

Against the euro, the world’s biggest wealth manager would eye levels above 95 pence as an attractive entry point, Yu’s colleagues wrote in a research note Monday. That would mean a slide of more than 6 percent in the pound.

Some investors are already buying back into the pound after it fell more than 1 percent last week. Japanese retail investors boosted their net long positions against the yen last week for the first time this month, while data from the Depository Trust & Clearing Corporation shows that calls made up 64 percent of all pound-related options traded since the start of last week.

©2018 Bloomberg L.P.