Richard Lawrence is positive on the pound over the euro. “It’s all about identifying undervalued assets,” he says.
Lawrence, who’s senior vice-president of portfolio management at Brandywine Global Investment Management in Philadelphia, Pa., explains that the “sterling is extremely cheap on our proprietary [purchasing power parity] model,” which is one of several currency valuation metrics he uses. He finds the pound is one of “the cheapest developed market currency against the U.S. dollar,” given it was valued at US$1.29 at close on May 8, 2017—that compares to US$1.23 in March.
The euro is also undervalued, he says, but “there are some fundamental aspects of the story about the euro that we think could keep the euro a little bit weaker relative to sterling.” Lawrence, whose firm manages the Renaissance Global Bond Private Pool, notes another part of his process is identifying “the catalysts that may lead to mean reversion in [an] asset.”
When it comes to euro, he says, consider that “you still have very accommodating monetary policy in the Eurozone […] until they get inflation consistently near their 2% target. They need a weaker euro to help stimulate the domestic economy. And, of course, you’ve got the political discount in the euro with a number of European election cycles occurring this year.”
Lawrence acknowledges there’s political uncertainty in the U.K. as well, which could impact the pound, but he says he’s been “really impressed with the way the U.K. economy has displayed some remarkable resilience.” In fact, he adds, “It was after Brexit that we took the position in sterling. Sterling fell against the U.S. dollar from the US$1.40s down into the US$1.20s.”
A weaker pound can also drive economic growth. “Tourism has surged,” says Lawrence, who finds “the U.K. is the cheapest place in the world right now to buy luxury goods [and] growth has held up remarkably well.”
As for politics, Prime Minister Theresa May announced a snap general election for June 8. “The goal there is to increase her majority, which will help strengthen her […] negotiations with the EU [on] Article 50,” says Lawrence.
Depending on how negotiations unfold, he may adjust his position in the pound. He says, “We’ll be watching […] the negotiations proceed with interest,” adding that the pound “isn’t a trade that’s going to necessarily work in [early] 2017. This is a trade […] over the longer term.”