Some nine months ago, the UK referendum on European Union membership was a fantastic exercise in democracy and, irrespective of individual political persuasion, engaged sections of society that were perhaps long lost to political apathy.
The decision has had far-reaching ramifications across the globe. Billions were wiped off equity markets as investors headed for safe havens in droves. The pound also collapsed over 10 per cent. The discombobulation lasted a few days before markets became comfortable that the Bank of England was in control of capital market fall-out, and that the UK would not trigger Article 50 for months.
Markets dislike uncertainty, but time constraints are even less palatable. Investors tend to make knee-jerk reactions when faced with a restricted time-frame to become comfortable with a new reality.
The British government has offered clarity since the referendum as to its initial negotiating position with the EU, and the timeframe for triggering Article 50. Investors do not yet have certainty as to the outcome of negotiations, but what we do know is that it will be at least a two year process.
With the reasonable assumption of a mutually-beneficial outcome, we feel there is value in owning UK assets. The British pound versus the euro and the US dollar remains at depressed levels, 15 to 20 per cent cheaper than pre-referendum.
Traditional macroeconomic drivers for the British pound, such as global growth, housing and the employment outlook, remain solid; however such drivers have been largely ignored since the Brexit vote. This vacuum has been filled by a political risk premium, which has kept the British pound at suppressed levels.
Domestic UK economic growth has defied even the most optimistic of economists, driven by the resilience of the British consumer. Asset valuations remain at attractive levels, with loose funding conditions provided by the Bank of England. Therefore, based purely on the resilience of domestic drivers, the British pound looks cheap for investors.
As the pound has become increasingly detached from domestic macroeconomic drivers, the recent upsurge in global growth cannot be ignored either. Global economic growth projections for the medium term continue to rise, with the IMF forecasting expansion of 3.4 per cent in 2017, up from 3.1 per cent last year.
Economic activity in both advanced economies and emerging markets is forecast to accelerate further in 2018. This is predominantly being driven by fiscal stimulus in the US and growth acceleration in emerging markets.
The British pound remains a global trade currency, and therefore upward revisions in global growth will add upside pressure on sterling appreciation. A continuation of the resilience of the British consumer, UK domestic economic strength, together with external global growth pressures are all setting the scene for an upside surprise in the British pound.
Domestic and foreign investors both see conditions that are highly attractive to buy into British pound denominated assets. There will be theatrics and volatility surrounding headlines, and of course the triggering of Article 50 next week, but that’s politics. Investors looking for assets in a robust, vibrant, and resilient country have a strong opportunity set today in the UK.