Sarasin & Partners' Guy Monson has warned sterling's recent show of strength against the euro could be about to end, as ECB intervention draws near and the UK's QE policy weighs on the pound.
Monson, managing partner of Sarasin and manager of a number of funds including its £144m Sarasin Global Equity Income fund, said sterling's rise in the last year against the single currency has left it looking susceptible to a reversal.
With ECB President Mario Draghi doing a good job of placating nervous investors thus far, Monson said sterling's growing list of headwinds could lead to a sell-off versus the euro from here if Draghi continues to formulate a eurozone recovery plan.
"Sterling now appears more vulnerable to the continued UK slowdown, further bond purchases under the latest round of QE, increasingly poor export data, and potentially rising tensions in the ruling coalition," he said.
"We are beginning to reverse our long-term euro underweight versus the UK currency."
Investors who have backed sterling recently have made solid gains, with the pound rising over 10% against the euro in the last twelve months, moving from €1.13 to €1.26.
Monson (pictured) added action being taken by Draghi had surprised investors and helped push up equity prices so far.
"Draghi is proving to be a surprising friend of global markets, with world equities up by around 10% since his appointment to the ECB in November 2011," he said.
"Most of the gains came in the aftermath of his big policy announcements; namely, the first round of his trillion euro LTRO programme last December, and more recently in his "whatever it takes" speech in London in July."
Monson said the 'Draghi Effect' is currently supporting a number of other assets, in particular property and income-paying equities.
"'Yield assets' will continue to be attractive, as financial repression caps cash and government bond yields at levels well below inflation," he said.
"The move to tighter and tighter blue-chip corporate credit spreads is almost inevitable, and lending to profitable companies with strong cash flow could be the more ‘gilt-edged' investment for some time yet.
"Meanwhile, the property market is another natural winner of a low interest rate, ‘search for yield' and ‘flight to safety' environment."
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