Sterling Rallies on Prospect of U.K. Recovery

Sterling is now trading at its highest level of 2009 on a trade weighted basis. Back in February, celebrity pundits like George Soros and Jim Rogers were resolutely bearish not only on Sterling, but the UK economy. In fact the ever quotable (but rarely right) Rogers said on Jan 21:

“I would urge you to sell any sterling you might have...it’s finished. I hate to say it, but I would not put any money in the U.K.”

While harboring no illusions about the scale of the downturn facing the UK economy, I alerted my subscribers to buy Sterling that same week, and went long in my personal portfolio as it was apparent that the key UK housing market, which never suffered the oversupply overhang of the US, was already stabilizing (at the same time I went very bearish on the Yen). Recent data, from mortgage approvals to completed transactions, has supported that thesis, and many of the most bearish forecasters, such as the CEBR (Centre for Economic and Business Research), now share my view that a supply shortage is supporting price stability after about a 25% peak to trough decline. In turn, this has proved positive for UK retail banks, urgent government support for whom last Autumn precipitated the slump in Sterling against the dollar and Euro.

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In fact, the UK government is now sounding out potential foreign buyers such as SWFs for its stakes in Lloyds (LYG) and RBS, thus potentially removing huge contingent liabilities from the public balance sheet over the next year. Meantime, European and other pension funds are beginning to buy UK commercial real-estate, which led the slump rather than lagged it as in the US. The combined impact of the currency move plus asset falls means prime London office space is 50-60% cheaper than at the 2007 peak to an overseas investor. Easing financial market conditions, as reflected in 2 year swap and the Libor-OIS speads back to 'normal' levels ie pre the Autumn crash, are bullish for a UK economy (and tax base) hugely dependent on the City's financial sector.

Recent capital markets activity in both equity refinancing and new bond issuance has actually exceeded that during the same period in 2008. Manufacturing and international services are now reaping the benefits of what was essentially a competitive devaluation in 2007/8, while the merchandise export dependent Eurozone remains mired in a deep recession.

Investment banks are now performing a screeching U-Turn on their previously bearish stance. As the pound approached near parity to the Euro a few months back, the momentum-chasing investment herd was, as usual, in full stampede and endless headlines screaming 'Pound in Crisis' were a classic contrary indicator. Barclays Capital now predicts Sterling will rise as much as 18 percent against the dollar and 11 percent versus the euro in the coming year. Goldman Sachs Group Inc. sees a 23 percent gain versus the dollar and 15 percent advance against the euro.

The UK, like the US and most other developed countries, faces a recovery constrained by consumer deleveraging and rising taxation to repay the enormous public debt accumulated during this recession. Nonetheless, as I've often noted before, currency investment in this environment is like a beauty contest where the winning strategy is to pick the least ugly contestant. Last year, against all expectations (although not mine, see Seeking Alpha article last July), that was the dollar. This year it will be Sterling.

Disclosure: None

Comments

[Dave Wrixon:]

As a Brit I am not over-confident in our economy, but it is a much safer bet than the US. The pound should not have depreciated against the dollar even if it weakened against just about everything else. It should fundamentally be down to levels of debt in an economy and the UK has more than its share but it is not drowning in the way the US is. Of course we have the disadvantage that our economic statistics are reasonably accurate.

May 20 01:10 AM

[Trader Maher:]

Jim Rogers is a very long term speculator, he does not look at noise in the very short term, in a year or two will see if his being very negative on the USD and Sterling was correct.

May 20 11:20 AM

[Aeternum Vale:]

Just maybe from time to time Jim Rogers talks one way and hedges another - shocking!

May 20 01:11 PM