Tuesday 21 November 2017

Investment giant warns of sterling plunge in 2017

Donald Trump
Donald Trump

Donal O'Donovan and Chiara Albanese

One of the world's biggest investment house is forecasting further declines in the pound, in what would be bad news for Irish exporters.

Pacific Investment Management Co (Pimco) profited last year from sterling's steepest slump since the global financial crisis, and is betting on the drop extending well into 2017 amid political uncertainties and a current-account deficit. The pound has fallen more than 17pc against the dollar since Britain voted to leave the European Union in June. It hit a 31-year low in October.

Sterling remains attractive to sell even as it's now undervalued by about 5pc based on purchasing-power parity, according to Thomas Kressin, portfolio manager at Pimco, which managed $1.55 trillion of assets at the end of September 2016.

"The pound has one of the worst current-account deficits in the developed world and remains vulnerable to Brexit headline risks," Munich-based Mr Kressin said in a phone interview. Pimco made "good money" last year by being "underweight" the British currency, he said.

The pound fell to as low as $1.2039 this week amid concern the UK is headed for a so-called hard Brexit, which could see the nation seek to regain control of immigration at the cost of having to quit Europe's single market, as the government's March deadline for triggering Article 50 of the Lisbon Treaty approaches. The British currency rose 0.4pc yesterday to $1.2267 against the dollar, while €1 traded at 87.3 pence sterling. The pound lost 16pc against the dollar and 14pc versus the euro last year, the most since 2008.

HSBC is forecasting that sterling will drop to as low as $1.10 if the most severe exit option is pursued. The median estimate in a Bloomberg survey of forecasters is for the currency to slip 0.7pc to $1.22 by mid-2017 and then to recover modestly to $1.25 by year-end.

Given elevated political risks, Pimco is running a tighter risk budget on active currency strategies and isn't holding positions in the euro despite seeing the single currency as undervalued. Political uncertainty in the region won't be limited to the Brexit process, and the market is now starting to focus on French elections due in April, said Mr Kressin.

"It is very hard to put a price on political risk," he said. "This is all unprecedented. Last year's events proved how hard this is. I am not sure that even those who called Brexit and Trump right made money."

Elsewhere on the markets so-called safe haven investments including US Treasuries rallied, while the dollar slumped with US stocks as investors reassessed markets that have surged since the election of Donald Trump in November. For months investments surged on a bet that Donald Trump's policies would jump-start American economic growth, but that confidence has been sapped since the president-elect gave a poorly-received press conference on Wednesday.

Mr Trump gave investors little reason to add to bets that had taken the dollar to a 14-year high and stocks to records. Some unwound those positions Thursday, sending the S&P 500 index to its biggest drop in two weeks, the dollar to a one-month low and emerging-market equities to the highest since the election. Banks shares led declines. The press conference left investors with few specifics on the timing and scope of planned policies from infrastructure spending to trade pacts. (Additional reporting Bloomberg)

Irish Independent

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