Downward path for sterling

Witan’s Andrew Bell expects sterling to weaken over the next 18 months owing to minimal interest rate rises and the general election

Witan Investment Trust chief executive Andrew Bell has been positioning for a weakening sterling despite the currency’s recent rally on the back of the recovery in the UK economy and speculation over interest rate rises.

Sterling hit a five-and-a-half-year high of about $1.72 at the start of July after strengthening steadily against the dollar throughout most of 2014 although, more recently, the currency has begun to slide, falling to about $1.66 at 22 August.
Bell believes the direction of sterling could change once interest rates begin to rise.

“Markets seem fixated on whether the UK will be the first big economy to put up rates and that this should mean sterling will keep climbing,” he says. “But maybe markets should be more focused on the idea that interest rates will stay low for a long period even when they do go up. That is a more important story than if we beat the Fed in putting up rates by a gnat’s nose.”

Bell also has one eye on the potential impact on sterling of the UK general election in 2015. The inevitable period of uncertainty ahead of the election is likely to trigger weakness in the pound, he says, but the currency could continue on a downward trend even when the result is decided.

He says: “Whoever gets into power will have to make tough decisions on taxation or public spending and they will inevitably do so in the first year or so, which is likely to weigh on the economy and slow growth.

“The only way to sustain growth if you are tightening the public sector and squeezing incomes is for sterling to be weaker because that way manufacturing should be more successful. So sterling will have
a weakening bias over the next 18 months.”

Another political event of significance is the upcoming referendum on Scottish independence. While acknowledging a surprise Yes vote could drive down sterling, Bell says the potential risk from Scottish independence has yet to affect markets.

“For now the markets are assuming what the opinion polls are saying, that Scotland will vote to stay part of the UK,” he says.

The obvious way to play a weakening pound is to directly buy overseas assets but Witan has opted to maintain significant exposure to UK equities. The portfolio has about 40 per cent invested in the UK but mainly through companies that generate earnings overseas.

Bell says: “In the UK market, 75 per cent of earnings come from overseas so you don’t just have to buy retailers and housebuilders. The UK is a good way of finding companies that are honestly and solidly capitalised but which are a play on global growth.”

However, Witan has a global mandate and is currently tilted towards emerging markets versus Europe. Bell says: “We have maintained that, based on a 10-year view, emerging markets are likely to carry on growing faster than developed markets.

“Emerging market economies are not dependent upon exporting to developed economies any more; they have got their own economies. So if you buy well-managed, honest companies in the West or in the markets themselves, the compound­ing effect of that growth will be a lot better than in Western economies.”

The fund is 5 per cent overweight in emerging markets and 5 per cent underweight in Europe.

Bell adds: “We would probably pick Europe as the most likely region to grow slowly. It is going to be a bit of a Cinderella over the next 10 years and, in some ways, fill the gap of Japan over the past 20 years because it is unable to find a decisive way out of a period of very low growth and depressed expectations. But culturally, Europe won’t put up with that for as long as Japan.”