Funds Bide Their Time on Pound as Poll Failures Raw in Memory
(Bloomberg) -- The U.K. election increasingly looks like a done deal but polling failures are fresh in the minds of investors.
The cost of protecting against a large swing in the pound over the next two weeks until the election jumped Friday by the most since before the Brexit referendum in 2016. Fund managers from Vontobel Asset Management AG, Nomura Asset Management Ltd. and M&G Ltd. are avoiding taking a bet on sterling or U.K. government bonds ahead of the Dec. 12 vote.
The U.K. currency has already rallied almost 8% against the euro since a near three-year low in August, making betting on further gains look risky before an election that will decide the direction of Brexit and the economy. Foreign investors have been offloading U.K. bonds while the FTSE 100 Index has lagged rallies in European and U.S. stocks.
“Every time you put a positive U.K. risk in your portfolio, you increase the worry of your international investors,” said Ludovic Colin, head of global flexible investment at Vontobel, adding U.K. assets were not cheap enough to automatically trigger an investment decision. “It is not that attractive yet as to jump on board.”
Polls suggest the Conservative leader Boris Johnson is on course to win, though the lead is narrow enough that some are worried about no party gaining a majority. Many surveys also failed to predict the Brexit referendum result or that the Conservatives would lose their majority in the last election in 2017.
Data from the Bank of England Friday showed foreign investors selling U.K. government bonds in October at the fastest pace since February. That month saw the U.K. prime minister secure a last-minute Brexit deal and extension to the deadline, before Parliament voted to back his bid for a December election.
For M&G fund manager Tristan Hanson, predicting election outcomes remains too much of a risk no matter what the polls are saying. He pointed to Donald Trump’s victory in the U.S. presidential election of 2016 as an example of a time when there was an unexpected outcome, and an unexpected market reaction.
“Not only can you often be surprised by the result, you also don’t know what the market reaction is going to be to that result, so you’re going to be doubly surprised,” he said, adding that he doesn’t have a strong view on sterling and thought “gilts are very poor value.”
For Royal Bank of Canada’s head of currency strategy Adam Cole, one of the most accurate forecasters on the pound-dollar pair for the third quarter, a win for Johnson is already priced in. He said the pound would struggle to take off beyond the low $1.30s on this outcome, while it could fall to around $1.25 on a hung Parliament.
“It doesn’t take a lot from here, three or four percentage points narrowing in the Conservative lead, and we start to move into hung Parliament territory,” he said in an interview with Bloomberg Television. “There’s every chance we get there in two weeks time.”
The biggest risk for investors is that the Brexit uncertainty that has dragged on the economy and sentiment since June 2016 persists. Some investors are already sounding the alarm about the trade talks set to follow with the European Union if Johnson delivers his promise to “get Brexit done” by the end of January.
Richard Hodges, a portfolio manager at Nomura Asset Management, whose global dynamic bond fund has outperformed most peers over the past year, said he has no positioning on the pound or U.K. gilts. He prefers adding to subordinated bank debt and equity on any weakness.
“I see it impossible to deliver any real successful Brexit in the time that has been suggested by Boris,” said Hodges. “Sterling will likely pop on any positive headlines but realistically the pound will at best be around $1.35 with a bias for it to be lower in light of this uncertainty.”
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