The chief executive of Old Mutual Global Investors has said the pound could still have a difficult time in the long run, despite the snap general election announcement causing its value to surge against the dollar.
Richard Buxton, who runs Old Mutual’s £2.2bn UK Alpha fund, said the recent fluctuations in sterling were driven entirely by perceptions of Brexit, which was demonstrated after last week’s snap general election announcement.
Prime minister Theresa May revealed on Tuesday (18 April) that there would be a general election on the 8 June, which caused the pound to rally by 2.4 per cent to $1.28.
Mr Buxton said a stronger majority for the Conservative party would mean the UK avoids a ‘hard Brexit’ deal because the government will not be “boxed into a corner” by Europe at the end of their parliamentary term.
We can’t find companies that are deferring anything they were intending to do or doing things differently.-Richard BuxtonA stronger government, he said, would mean sterling is less likely to weaken.
However, the OMGI fund manager said he didn’t think this was the start of a major new bull market in the pound.
“I worry that when the economy does slow that we can’t do anything with monetary and fiscal policy, which means the only safety valve we have is sterling.”
He said the government has reached the end of the road with monetary policy, while the budget deficit is still too big for fiscal stimulus, meaning a weaker currency is now the only way to stimulate the economy.
“We may well have a powerful rally in the currency, but I still think that in the long-term sterling is going to struggle.”
In light of this, Mr Buxton said he was not planning to reduce his overseas holdings, which largely benefit from the weaker sterling because the earnings they make abroad are more valuable when brought back to the UK, nor will he be loading up on beneficiaries of stronger sterling.
According to figures from FE, the OMGI UK Alpha fund has returned 16.5 per cent over three years, underperforming the IA All Companies sector which returned 17.4 per cent.
In January, the OMGI chief told FTAdviser that he thought the pound had not yet hit rock bottom.
Speaking at an OMGI event on Thursday (21 April), he said the British economy has defied governor of the Bank of England Mark Carney’s expectations by continuing to “chug along”, growing at around 2 per cent per year.
“I think the UK economy could slow a bit this year due to Brexit uncertainty, although we can’t find any evidence of that whatsoever.
“We can’t find companies that are deferring anything they were intending to do or doing things differently,” he said, pointing out that there are 750,000 job vacancies currently in the UK, with the demand for labour staying strong.
While the investment veteran said he was keeping a close eye on Europe, he said he wasn’t worried about any of the European elections this year.
“The French electoral system is designed to ensure an extremist can’t win, and a different coalition in Germany won’t produce any radical changes in policy.”
Mr Buxton said the surprise from Europe this year will be that the region will grow, with companies across the continent already starting to gather momentum.
Philip Milton, managing director of financial planning firm Philip J Milton & Company, said he disagreed with fund managers who call currency a distraction.
“If I can find a market and a currency which I think is undervalued, then I am doubly interested.”
Mr Milton said taking a view on currency moves was important, pointing out that he was very overweight non-sterling last year to hedge against the Brexit vote.
“That was an excellent move for us, but we have started to repatriate overseas’ funds to buy cheap pounds.”
He said he thought there was too much “euphoria” around the dollar, meaning its value was likely to fall, while sterling was fundamentally undervalued.
katherine.denham@ft.com
