Forget about the dollar — collapsed sterling is your best bet, says top U.K. fund manager
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With the pound GBPUSD, +0.1621% down almost 20% and counting since the Brexit vote, investors could be forgiven for giving the U.K. currency the cold shoulder.
But not if you are Alan Higgins, the contrarian chief investment officer at Coutts & Co. in London, the bank famed for having Queen Elizabeth II among its clients. He sees the pound’s pounding as nothing less than one of the best investment opportunities this year.
“We are buying sterling now,” he said. “I must admit it’s very uncomfortable first thing Monday morning, when [a co-worker] says to me: ‘Are you still buying sterling after the news over the weekend? I said, ‘Yes, because our principle is looking for value and being contrarian.’”
Higgins’ contrarian mindset has helped him make big returns before. When investors dumped Russian assets in 2014 after the annexation of Crimea, the Coutts investment manager started to look for value in the region and has benefited from the market shooting higher.
This past Monday morning, the pound slumped to an almost 31-year low against the dollar after media reports said U.K. Prime Minister Theresa May wanted to lead Britain out of the EU’s single market as part of Brexit. The reports were confirmed on Tuesday, when May in a highly anticipated speech said she wants the U.K. to control its own border and courts, which isn’t compatible with complying with rules that allow access to the single market.
She also promised to put the final Brexit deal to a vote in parliament, spurring sterling to recover some of Monday’s losses. Most analysts, however, still expect the pound to head lower — some even see parity with the euro and dollar — as Brexit potentially starts to hit the economy.
But Higgins sticks to his view that the U.K. currency is bound for a longer-term recovery.
“The fact is that sterling is quite a mean-reverting currency against the dollar and the euro. So there’s historical evidence to show it does mean revert,” he said.
Mean reversion refers to the theory that some assets over time eventually moves back toward a mean or average after big slumps or rallies. That indicates that the pound should rebound from its post-Brexit slump, Higgins explained.
“We recognize the political risk, and maybe we are wrong and Brexit becomes so defining and such a change that it’s not business as usual,” he said. But when looking at the sterling trading around $1.20 and sterling/euro at 1.15 “we’re saying there’s value in the mean reversion trade.”
As for Higgins’s contrarian bet on Russia, after a bumpy ride in the beginning, the strategy turned out to give “absolutely stellar returns” in 2016, he said. The Russian MICEX Index MCX, -0.06% , for example, soared 26% in 2015, and by 24% in 2016.
“We bought Russian equity and Russian debt when it was bumped out and everyone was talking about geopolitical risks. We just saw great value both in the bonds and in the equities. It was painful for a while, but that tends to happen when you have a value and contrarian approach,” he added.
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