Russell Silberston explains why he is looking favourably on sterling despite market jitters ahead of the UK's exit from the European Union.
The UK has had two female Prime Ministers. The first of them, Margaret Thatcher, made a speech at Lancaster House on 18 April 1988 challenging business to embrace the "opportunities presented by the completion of the Single Market in the European Community in 1992".
The second, Theresa May, speaking in exactly the same place, on 17 January 2017, vowed to take us out again.
The speech brought some welcome clarity about how the government intends to negotiate an exit from the European Union and, in effect, fired the starting gun for the Brexit process. In line with what appears to be government protocol, much of the speech had been leaked in the press.
However, the PM kept a surprise up her sleeve, promising to "put the final deal that is agreed between the UK and the EU to vote in both Houses of Parliament, before it comes into force".
This disclosure saw sterling rally very strongly, and we believe this has now set the scene for a rally in sterling and set out the rational below within the context of our 'compelling forces' framework.
Cyclically, the UK economy is holding up well, with economic data flow, momentum and surprises all positive. We believe the Bank of England will continue to support the economy.
One of the factors weighing down on the currency has been the uncertainty surrounding what Brexit actually means.
The fact that there are now clear checks and balances on the process, including the vote and a transition period between leaving the EU and adoption of our final trading rules will reduce the risk premium that sterling has attracted.
Offsetting some of these positives are the underlying structural deficits the UK faces in her current, budget and trade deficits. Fundamentals are, on balance now more favourable than they were.
Valuing currencies is fraught with danger, as the half-life of any valuation model is measured in years; as such a currency can remain out of line with its valuation for several years. With this disclaimer in mind, sterling is 7.5% cheap against the average of the three valuation models we run.
Our final compelling force, market price behaviour is also supportive. Sterling is a consensus short position and positioning surveys suggest market participants are positioned this way.
Interesting, the currency's Trade Weighted Index, our favoured measure of sterling's true behaviour, has held the lows it reached at the height of the global financial crisis. In the parlance of chartists, there is now a clear double bottom on the charts.
We are therefore favourably disposed to sterling; fundamentals have clearly improved, valuation is cheap and everybody hates it. Risks abound, of course, and the UK is on a path that has not been trodden before.
However, we would argue that this is now in the price and reflected in sterling's large risk premium.
Russell Silberston is a portfolio manager in the Investec multi-asset team
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