(Bloomberg) -- It’s half time in the waiting game for Brexit and some of Europe’s top funds are still struggling to find a reason to buy the pound.
Twelve months after the U.K. triggered the two-year process of its withdrawal from the European Union, the two sides haven’t even got round to starting trade talks and that’s prompting Amundi SA to maintain a short position on sterling. While a transition deal signed this month buoyed the British currency, Allianz (DE:ALVG) Global Investors GmbH warns that markets may be underestimating risks and is bearish on the pound.
Expectations that the Bank of England could raise interest rates as early as May have helped sterling outperform most Group-of-10 peers this year, but AXA Investment Managers remains skeptical about the odds of policy tightening amid lingering economic uncertainties. Option volatility on the U.K. currency has averaged higher this quarter as the nation faced an industrial slowdown and subdued consumer confidence.
“The transition deal has not removed political uncertainty from the U.K.,” said Didier Borowski, head of macroeconomic research at Amundi, Europe’s largest money manager that oversees over 1.4 trillion euros ($1.7 trillion) in assets. “We are still in the middle of nowhere and are very much unclear concerning the final deal that will be negotiated. So we are still very, very cautious concerning our exposure to the currency and British equity markets.”
‘Too Complacent’
While the pound is the third-best G-10 performer this year with a 4.1 percent gain to about $1.4060, it has retreated 2 percent from a high of $1.4345 in January. Implied volatility on three-month sterling-dollar options averaged 8.3 percent this quarter, compared with 7.8 percent in the previous three months, showing traders are concerned about future price swings.
The currency plunged to a 31-year low in October 2016, following the U.K.’s June vote to leave the EU. Even as the 18 percent rebound since then reflects improved sentiment, the market may now be overlooking the fact that uncertainties remain, according to Mike Riddell, a portfolio manager at Allianz.
“The market is now far too complacent,” he said. “Markets have gone from being over-concerned about the fallout from Brexit, to flipping the other way.”
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Riddell remains bullish on U.K. government bonds but is “particularly more fearful for sterling if things don’t pan out as well as” expected. A deterioration in U.K. economic data could drive 10-year gilt yields below 1.30 percent in the next 12 months from 1.36 percent currently, he said.
Not all money managers are bearish on the British currency.
Pacific Investment Management Co. has a long pound position versus the euro, betting that the risk of Brexit negotiations collapsing is now “incrementally lower,” Andrew Balls, chief investment officer of global fixed income, said in an interview with Bloomberg Television Wednesday.
Aberdeen Standard Investments is upbeat on the pound’s short-term prospects after the transition deal, but refrains from taking a long-term call given the political risks. The pound could rise against the euro toward pre-Brexit vote levels of around 76 pence by year-end from about 88 pence currently, said Luke Hickmore, senior investment manager at the firm.
Pound bulls are betting on rate increases by the BOE, with money markets currently pricing in an 83 percent chance of a move in May, and some predicting a second hike toward the end of the year. If the central bank pauses after one rate increase this year, trade-weighted sterling could slide five percent, according to Allianz’s Riddell.
Nothing Agreed
AXA Investment’s Chris Iggo remains unconvinced the BOE will tighten policy at a time when the economic fallout from Brexit is still unclear.
“I find it hard to see the BOE raising rates in the final year of Brexit negotiations when we don’t know what the final trade deal will look like,” Iggo, AXA’s chief investment officer for fixed income, wrote in a client note. “Nothing is agreed until everything is agreed.”
The one thing fund managers agree on is that positioning for what the next 12 months have in store is difficult.
“The eventual outcome is not a straightforward thing to get right in its entirety, which means you have to look to short-term negotiations instead,” Aberdeen’s Hickmore said. “The chance of being wrong increases, the longer time horizon you have. The old adage about a week in politics being a very long time is well worth remembering.”
(Updates prices from fifth paragraph.)
