Asia-Based Investors Capitalize on British Pound’s Post-Brexit Plunge

Source: Forex News

The post-Brexit selloff of the British pound sent shockwaves throughout the global financial markets. It also made a handful of Asia-based hedge funds very wealthy as investment managers used the pound’s discount to increase their footprint in the United Kingdom.

Pound sterling fell to 31-year lows against the dollar in the aftermath of Britain’s decision to leave the European Union (EU) on June 23.[1] One month later, the pound still hasn’t recovered, making it the biggest casualty of the so-called Brexit. What’s more, the currency is unlikely to experience a major rally anytime soon since the Bank of England (BOE) is eyeing a rate cut as early as August.[2]

Singapore-based hedge fund Vulpes Investment Management was one of the firms to capitalize on the Brexit bargain. The hedge fund has used a cheap pound to finance a growing portfolio of UK-based companies. Vulpes already owns major stakes in six British biotechnology companies through its life science hedge fund.

“We are regarding this as a buying opportunity in sterling assets, especially for businesses which benefit from sterling being near a multi-decade low against the U.S. dollar,” Stephen Diggle, who heads Vulpes Investment Management, told Bloomberg.[3]

Diggle isn’t the only Asia-based investors looking to capitalize on the pound’s discount. UBS Group AG, the world’s largest private bank, says some of its wealthiest investors are preparing to snatch up real estate bargains. Societe Generale, a French multinational banking and financial services firm, recently warned that Brexit will trigger a huge market correction in London, where homes may be overvalued by up to 50%.

“Given the current ratio of prices to incomes in London, a price correction of even 40-50% in the most expensive London boroughs does not seem impossible… we see a classic housing bubble in London and Brexit as the trigger for the correction,” the bank said in a July research note.[4]

The UK economy as a whole is expected to face a prolonged period of instability as Theresa May’s Conservative government navigates the country’s safe passage out of the European Union. That transition will be a painful one. The International Monetary Fund (IMF) recently downgraded its outlook for the British economy this year and next. Britain’s gross domestic product (GDP) is forecast to grow just 1.2% in 2017. That’s well below the previous forecast of 2.2%, the IMF said in the July edition of the World Economic Outlook report.[5]

The post-Brexit selloff of the pound isn’t all bad news. A weak pound is expected to help the country’s fledgling export sector, thereby leading to a more balanced economic recovery down the round. A weak pound will also directly benefit the bottom line of US dollar-earning firms based in the UK.[6]

“From there it is easy to extrapolate that other companies in the U.K. will have similar economic effects, so we have gone looking for bargains. U.K. service companies that sell to the U.S. are the most obvious,” Diggle said.[7]

What’s more, the outlook on the pound isn’t nearly as gloomy as it was just a few months ago. Options traders have reduced their bets on the pound’s decline than they did last month, perhaps signaling that the GBP/USD exchange rate referenced by the global currency markets has already seen its bottom.

Investors are also buying into Prime Minister Theresa May’s leadership. The new British prime minister has already appointed a so-called Brexit minister to help the UK negotiate a new trade partnership with the European Union. She also appointed key Brexit proponent Boris Johnson to Foreign Secretary, a move that may prove beneficial in reuniting the Conservative base.

David Davis, the new Secretary of State for Exiting the European Union, has stated that Britain will formally notify Brussels of its intention to leave the European Union before the end of the year.[8] From there, the outlook on future UK-EU trade relations should be easier to gauge.

Greater confidence in the May regime has also been reflected in UK stock prices. London’s FTSE 100 Index, which gains considerable exposure to domestic stocks, soared to 11-month highs in mid-July.[9]

[1] Leslie Shaffer (June 27, 2016). “Sterling falls below Friday’s 31-year low amid Brexit uncertainty.” CNBC.

[2] Tim Clayton (July 14, 2016). “BoE Interest Rate Decision: Bank of England Leaves Rates Unchanged, Expects to Act in August.” Economic Calendar.

[3] Netty Idayu Ismail (July 18, 2016). “Brexit Bargains Scented by Asia’s Rich After Pound’s Plunge.” Bloomberg.

[4] Shane Croucher (July 18, 2016). “Societe Generale: There is a house price bubble in London and Brexit will trigger a correction.” IB Times.

[5] International Monetary Fund (July 19, 2016). World Economic Outlook Update: Uncertainty in the Aftermath of the U.K. Referendum.”

[6] Netty Idayu Ismail (July 18, 2016). “Brexit Bargains Scented by Asia’s Rich After Pound’s Plunge.” Bloomberg.

[7] Netty Idayu Ismail (July 18, 2016). “Brexit Bargains Scented by Asia’s Rich After Pound’s Plunge.” Bloomberg.

[8] Laura Hughes (July 14, 2016). “New Brexit Minister David Davis declares Article 50 should be triggered by end of year.” The Telegraph.

[9] (July 11, 2016). “FTSE 100 rises to 11-month high.”

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