BlackRock Still Believes in the Pound

  • U.K. economic backdrop stronger than expected, Thiel says
  • Morgan Stanley targets sterling at $1.28 by the end of 2017

What Brexit Means for Pound Sterling

As the U.K. starts the process of leaving the European Union, an investment director at the world’s largest money manager isn’t giving up on the pound. And he’s not alone.

BlackRock Inc., which reduced some of its exposure to sterling ahead of the triggering of Article 50, is still marginally long as an expected slowdown of the U.K. economy hasn’t materialized. The fund had eliminated its exposure to the pound ahead of the U.K. referendum on the EU last year. Morgan Stanley and UBS Wealth Management are also recommending that investors buy the currency.

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“The fundamental backdrop in the U.K. is stronger than expected, inflation seems to be accelerating, and therefore the fundamentals are positive,” said Scott Thiel, deputy chief investment officer of global fundamental fixed income at BlackRock, which manages around $5 trillion. “We are still long through options strategies, but we hedged some of the depreciation.”

The pound has shown few signs of panic in recent months, with gauges of expected swings in both the short and long term dropping. Three-month implied volatility was at 9.1 percent on Wednesday when Prime Minister Theresa May launched the Brexit process, less than half the level seen in the run-up to the June 23 referendum. The pound was little changed after the trigger of Article 50 and traded steady at $1.2431 on Thursday.

Sterling, which earlier this month was 2017’s worst-performing Group-of-10 currency, is now headed for its first quarterly advance since mid-2015 against the dollar. BlackRock’s Thiel expects it to fluctuate as the Brexit negotiations unfold during a “very tight” two-year timeframe, and so is hedging downside risk via options.

“It’s in everyone’s interest, in the European interest as well, to get something sorted out before the end of the two-year period,” Thiel said in a briefing in London.

‘Excessive Pessimism’

Morgan Stanley is recommending its clients buy the pound as it thinks Brexit risks are already priced in. It sees “excessive pessimism” around the negotiations, large short positioning and an extreme undervaluation of the currency, leading it to forecast the pound will hit $1.28 by the end of this year and $1.45 next year. The latter would be a 17 percent increase from the current level.

UBS Wealth Management is also sticking to a message of “keep calm and stay invested” in the U.K., assuming the nation’s talks with the bloc are broadly constructive. It sees sterling moving toward $1.36 in the next 12 months.

“We are positive on sterling and look at dips as a buying opportunity,” said Geoffrey Yu, head of the U.K. investment office of UBS’s wealth-management division.

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