M&G’s Leaviss warns on sterling valuation

Leaviss Jim MG 480
Jim Leaviss

M&G head of retail fixed interest Jim Leaviss has warned the expected loss of the UK’s AAA credit status will result in the value of sterling falling in 2013.

Speaking at the Joint Investment Forum in Horrogate, the fund manager – who placed a 4 per cent short position on sterling within the £303m M&G Global Macro Bond fund in October – said that having seen a 16 per cent increase since 2009, sterling now looks expensive and will fall in the next 12 months.

He said: “Sterling appreciation is based on the safe haven status and the UK’s AAA credit rating as well as the Government’s promise to get the debt burden under control. There has also been flight of capital out of the Eurozone to sterling.”

Leaviss said that UK will lose its safe-haven status and this may happen in 2013.

He said: “That is likely considering we are missing our debt targets and we may enter into a triple dip recession. We cannot get our debt burden under control.”

He said the European Central Bank’s president Mario Draghi’s promise to do anything to support the Eurozone has caused capital flight from German banks into Italian and French banks, which shows there is no need for the UK to be regarded as a safe haven.

Leaviss warns that current account deficit levels are looking similar to those in the 70s. At the end of the third quarter of last year, the current account deficit stood at 3.3 per cent of GDP, according to figures from the Office of National Statistics.

He said: “Our current account deficit is out of control. We had a current account deficit of around 2 to 4 per cent of GDP in the mid 70s and sterling fell 30 per cent against the dollar.”

Leaviss adds that sterling depreciation could be “very inflationary over the medium term.”

He warned that China growth could dip below the most sceptical consensus of 7.5 per cent per annum GDP growth, as business will move away from China to find cheaper places to base their activities, like Vietnam.

He said: “I think that the China slow-down has got a lot further to go over the next couple of years.  The consensus is there will be a slowdown and GDP will fall to 7.5 per cent and that is as bad as it gets.

“China is heavily lending and when there is so much leverage, bad things happen, like in Iceland. I think 5 per cent GDP growth is more realistic for China.”