Currency positions have been helpful for us over the last few weeks and our substantial allocations to non-Sterling currencies have been helping us to deliver positive results following the referendum. But how are we now beginning to update allocations?
Currency positioning has been helpful for us over the last few weeks, with our substantial allocations to non-Sterling currencies helping us to deliver positive results through the referendum period.
However, foreign currencies also present an enormous challenge over the next few months. Any view on Sterling must take account of the strong headwinds that face the UK economy, which seem set to lead to a meaningful slowdown in growth and cuts in interest rates. At the same time Sterling is also reacting to the uncertain and rapidly shifting political landscape, forcing markets to price in different ‘shades’ of Brexit.
That landscape shifted dramatically again yesterday, with the emergence of Theresa May as Prime Minister-in-waiting. A drawn out period of uncertainty before the appointment of a new Prime Minister (PM) has fallen away, and markets are now trying to judge whether a May premiership raises the probability of a good Brexit deal, preserving free access to the single market. So far, markets appear relieved that the UK will have a leader in place sooner than initially feared – a leader widely seen as more competent and pragmatic than rivals for the post.
As you may know, we have been incrementally reducing our overseas currency positioning and topping up Sterling exposure in the wake of the Pound’s post-referendum collapse. As part of our revised Tactical Asset Allocation (TAA) outcomes, post-Brexit, we have set target levels for Sterling in various economic scenarios. As the currency moves versus these levels and events, such as May’s appointment, push us to revise the probability of each scenario, we will continue to revisit our portfolio positioning accordingly.
We had already hedged our Japanese Yen exposure and hedged some US Dollars back to Sterling in the first week after the referendum. Yesterday, as the selection of May as PM was confirmed, we hedged another tranche of US Dollars back to Sterling (around 3% of all portfolios at just below US $1.30).
This is the latest incremental step in a very substantial shift in the portfolios. In the Balanced fund, US Dollar allocation was around 26.5% of the portfolio on the morning of June 24 – we now have just 15.5% in US Dollars. Similarly, Sterling accounted for just 48% of the portfolio the day after the referendum – we now hold 62.5% in Sterling.
We continue to monitor the situation and will make further changes as necessary.
Deputy Chief Investment Officer
Seven Investment Management LLP is authorised and regulated by the Financial Conduct Authority. Member of the London Stock Exchange. Registered office: 55 Bishopsgate, London EC2N 3AS. Registered in England and Wales No. OC378740.
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