Trading Brexit hasn't worked
The FT's markets team analyses whether trading Brexit has been profitable after the pound and the British economy has been shown to be more resilient than market strategists anticipated
Produced by Alessia Giustiniano. Filmed by Rod Fitzgerald.
Since the UK voted to leave the European Union, the so-called Brexit trade has been pretty much a one way bet. But the recent rise in sterling suggests that some of those investors who played sterling short are now getting very much caught out. Well, with me to discuss the implications of this is Miles Johnson, the FT's capital markets editor.
Miles, the extent to which investors are feeling the pain from this sterling rise, can you give us a sense of how much they've been burned?
What happened was basically post Brexit there were these sorts of consensus trades that started to emerge in the market where it was hard to find a single person in the whole of the city of London who was even moderately positive sterling. A lot of investors, you know, sort of currency speculators, hedge funds, took very bearish views on sterling.
This is kind of the George Soros school of investing or getting bearish on a currency, isn't it?
Yeah, it was sort of speculating on a currency, expecting it to fall against another currency as a circle currency cross. And basically, it hasn't so far. Obviously, we're in very early days in regards to what's going to happen with Brexit. But it hasn't happened. You know, the big crash in sterling to sort of parity with the euro and stuff hasn't happened yet.
Now it depends how long you might have been bearish on selling. If we look at our chart which looks at sterling's rise and fall since Brexit, I mean, you might have played it short term and got out if you-- with hindsight we can say obviously-- at the beginning of 2017 you'd have done quite well, wouldn't you?
Yeah, I mean, you know, anyone who was lucky or smart enough in some way to time the market, you know, then they've done well. But you know, the thing is is that these people were forming these views on what they expected to be a sort of considered assessment of the macro and political risks to the UK.
So they would have played it long.
And they would have played it quite long duration and they would've played it short sterling.
It's hard to say if someone would have held that position throughout this entire process. But it more is just not what people were expecting, you know, sort of nine months ago, 12 months ago. And it really illustrates the difficulty of trying to use a sort of economic analysis to speculate on currency.
Now there are different assets which from the beginning people thought, well, you should watch this. I mean, our second chart is about the FTSE 250 small caps. Now by the looks of it, they've done pretty significantly successfully throughout that Brexit period.
Well, this is another interesting kind of illustration of the difficulties of making these sort of circle Brexit bets. Because the idea was the FTSE 100, the large cap index, was very internationally diversified. So you couldn't really use it as a proxy for anything going really wrong with the UK economy post-Brexit or during the negotiation process to leave the EU.
But the FTSE 250, which is the smaller mid-cap companies, people thought, oh, it's more domestically exposed, so maybe that's the place where we can sort of express our view. But actually, because a lot of FTSE 250 companies are still earning a lot of their revenues in overseas currencies, there's a lot of things like investment trusts in there, so really it's not a clean expression of any view on the UK economy.
And it's been coming off, as you can see, more recently. And our final chart probably gives us the point to where all of this is heading. Because is it not about-- as you were saying right at the beginning-- we don't really know what Brexit actually is going to achieve. And this chart about GDP UK is the tell all of what might happen, isn't it?
Yeah, I mean I think, you know, there are people who argued that the pound is very overvalued regardless of Brexit. You know, the UK's current account position is the worst of the developed economies. There were situations, you know, people were saying before Brexit the pound was going to fall and the UK economy has a lot of rebalancing to do. Those investors, they'll continue to sort of speculate on currencies based on fundamentals. But whether they'll actually ever be able to get it right in the long term we'll see.
Very finally, do you go short or long sterling from here?
I would probably-- it's a bad answer. I probably-- I don't really see-- I think it's probably fairly valued at this point.
Yeah, it's pretty much in limbo. Miles Johnson, thank you very much, indeed.