Bet Against Brexit, Buy the Pound, Emerging Market Investor Says

  • Landesbank Berlin adds Petrobras, Pemex, Gazprom pound bonds
  • Pound forecast to appreciate against euro by year end

Lutz Roehmeyer thinks Britain will vote to stay in the European Union, making emerging-market bonds issued in pounds a buy.

Roehmeyer, who oversees about 11 billion euros ($12 billion) as director of fund management at Landesbank Berlin Investment GmbH, has this year added to his holdings of sterling-denominated debt issued by companies in Russia, Dubai, Mexico and Brazil.

over euro
over euro

“GBP weakness explains 90 percent of our decision to increase the size of bonds,” Berlin-based Roehmeyer said in an interview. “The pound weakened a lot against the euro as Brexit fears loom; we think that is nonsense. The U.K. will stay in the EU and the pound will appreciate against the euro following the referendum.”

Concern that Britain could exit the bloc it joined 43 years ago has sent the pound tumbling and boosted volatility to its highest since 2011. Sterling has lost 9.8 percent against the euro over the past three months and fallen 6.6 percent against the dollar. Investors holding assets in a weakening currency risk losing money if they need to sell them. Similarly, they stand to gain if the currency rises.

Prime Minister David Cameron is in Brussels fighting to persuade the 27 other EU leaders to back new membership terms for Britain that he can sell to voters at home. If a deal is sealed, he could hold a referendum as early as June 23. Polls suggest the result of the referendum is hard to call, with most telephone surveys finding leads for staying in the EU of more than 10 percentage points and more frequent online surveys showing the “leave” vote ahead at times.

Pimco Warning

Uncertainty over the result is likely to weigh on U.K. markets for a few months, Mike Amey, a portfolio manager at Pacific Investment Management Co., said in an e-mailed statement on Thursday. While Pimco assumes the U.K. will vote to remain in the EU, it says the risk of a Brexit is as high as 40 percent.

Depending on how strongly the pound recovers against the euro, Roehmeyer, who holds pound debt in Petroleo Brasileiro SA, Gazprom PJSC, Petroleos Mexicanos, Hungary, Italy and Spain, expects a return of between five to 10 percent a year over the next three years. The pound is forecast to strengthen to 73 pence per euro by year end from 77.92 pence on Friday.

Little Effect

The yield on Gazprom pound notes due in 2020 has risen 38 basis points this year to 6.88 percent on Friday, taking the premium over euro bonds of the same maturity to a near five-month high of 205 basis points. The spread between Petrobras pound bonds due in 2026 and euro debt due in 2025 has more than doubled to 222 basis points.

Even if Britain quits the EU, the effect on the currency in the medium to long term is likely to be neutral, according to Per Hammarlund, chief emerging-market strategist at SEB SA in Stockholm.

“If the U.K. leaves the EU, I don’t think the divorce would be ugly,” Hammarlund said. “The EU and Britain are likely to reach a separation agreement that would leave trade and capital flows virtually free, and that should support the pound over the long term.”

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