Sterling recently reached its lowest level versus the dollar since March 2009. According to Anthony Rayner, manager of Miton’s multi-asset fund range, the UK political narrative has been dominated by an increased risk of Brexit.
UK economic data has been less than encouraging and guidance by the Bank of England has been much less hawkish, compared to last summer, Rayner added.
“Our base case has been that the Brexit referendum will see a vote to stay in the EU, driven by concerns about the related uncertainty and transitional costs of an exit,” said Rayner. “However, surveys suggest that, whilst EU membership is not a massive issue for many, the refugee factor is a concern, and recent polls reflect this. As a result, in an environment where refugee flows aren’t slowing, and are set to increase with better weather, the risks against our base case have increased,” he added.
Moreover, the UK's political landscape today looks very different from the summer’s positive political image as viewed by FX markets, according to Rayner. “So, while sterling is no longer the currency pin up boy, with so many cross-currents, not to mention the curve-ball of unexpected policy action (for example by the Chinese authorities), we think taking brave currency positions is particularly unwise at the moment,” he said.
Apart from the Brexit, Rayner mentions that the elections in May, local elections and Scottish Parliamentary elections will all set the tone for future political developments. This, in combination with a slowed economic momentum and a sharp decline in risk assets (including the oil-price), means the Bank of England fells comfortable in ‘wait and see’ mode, he said.
“Generally, as our investors are sterling based, we think of currency risk as not holding sterling. In reality of course there is performance risk of not having enough exposure to overseas currencies in an environment of extended sterling weakness: as ever, it’s all about balance,” said Rayner.