Sterling has fallen significantly since Britain voted to leave the European Union in June 2016. On 23 June, the day of the vote, £1 was worth $1.48. The current pound to dollar exchange rate is $1.30.
This in turn has driven up the value of overseas earnings achieved by many companies on the FTSE 100, which derive about 70 per cent of their sales from outside of the UK, leading to share price gains for those companies.
Mr Barnett, who succeeded Neil Woodford as manager of the £11.2bn Invesco Perpetual High Income fund, the £5.6bn Invesco Perpetual Income fund and the £1.7bn Edinburgh Investment Trust, said this has caused equity investors to buy companies with overseas earnings at the expense of UK companies that generate the greater part of their earnings from within the UK.
The results, he said, are FTSE100 valuations at levels he does not find attractive, and managers, and their investors, missing out on cheaper gains.
"While the headline figures for earnings growth look reasonable for a number of sectors in the UK equity market, I worry that this currency-driven benefit has been largely accounted for and that too many risks are not priced into equities," he said, adding continued growth in underlying earnings looks unlikely.
By comparison he said sterling had reached such a low level that even during periods of recent uncertainty such as from the outcome of the UK general election, the currency remained “stable.”
In line with this view, Mr. Barnett has been increasing his exposure to UK property shares.
“As a result of the fall in sterling, I believe the market has assumed an overly pessimistic outlook for domestically focused businesses in a number of sectors.
"This is particularly true of the real estate sector. I continue to see valuation anomalies in this area and have added to positions in a number of companies with positive trading prospects, despite fears of a deterioration in the UK economy through the Brexit period.
"These include specialist real estate companies Derwent London, Shaftesbury and NewRiver REIT.”
Steven Andrew, who runs the £735m M&G Episode Income fund, is another investor who believes sterling could be on an upward trajectory.
He said the currency reached levels in the aftermath of the EU referendum vote that meant it was more lowly valued than when the IMF had to bail Britain out in the 1970s, [and] lower than when the country left the Exchange Rate Mechanism in 1992”.