Views

Gambling On The Pound

4th March 2016

Anybody willing to wager on Brexit? We now know the date of the referendum and expect to see Boris and Dave throwing a myriad of statistics at us on the impact of our decision. Unemployment up/down, trading opportunities better/worse, sterling stronger/weaker will all be backed up by statistics and eloquent verse. Who will come out on top will be decided by the nation, but one thing for sure is that we are in for a lot – and we mean a lot – of noise.

We have already seen sterling fall sharply on the back of Boris planting his flag in the “out” camp. With its fall the commentators are out in force, and an interesting article in Pensions Expert quotes a number of investment consultants who suggest that those with dollar exposure should be unhedged. This could be very sensible and lucrative if sterling continues to fall. However, is that not a direct bet on Brexit? If we come out of Europe, sterling may well fall further. If we stay in, we may see a snap back. We also have some uncertainty around US elections and the world view of a certain Donald Trump but let’s leave that, and all the other factors affecting currency, aside for the time being.

Our concern is that recommending a bet on Brexit is a dangerous game. The polls are showing a pretty close race and one would assume that this is reflected in sterling’s position against the dollar. So, let’s assume a 50-50 chance of Brexit, evens. Is this a short term bet you wish to make as a trustee of a pension fund? There is an evens bet that Scotland will beat France at Murrayfield – would you bet your dollar exposure on that? As a firm, currency is the one area where we take no view. Indeed, it is very easy to lose your shirt in the currency markets – even a return to $1.50 will wipe over 7% off dollar returns. Our job is to find long term opportunities not to take short term bets on one asset class or the outcome of one event.

At current levels our clients are fully hedged and so Brexit does not change our approach and, at least from a currency perspective, we are indifferent to the Boris/Dave debate. There are also many other uncertain outcomes such as the US election result or the pace of Fed rate rises, which may completely overshadow the events of 23rd June. Given all this ambiguity, we will let others gamble on the pound.