UK Prime Minister Theresa May’s decision to step down as leader of the Conservative Party in June will not solve the big Brexit debacle - if anything, things are about to get a lot more complicated for investors.
The pound, which has lost almost 4% of its value against the euro and dollar over the past three weeks, remains under pressure near EURGBP 0.88 and GBPUSD 1.27, points out UBS Global Wealth Management’s Mark Haefele.
The Zurich-based CIO said while a no-deal Brexit could take the pound as low as USD 1.15 and 0.97 versus the euro; a further Brexit delay could see the pound trade in a range between USD 1.28 to 1.34.
He said UK’s decision to remain an EU member would likely cause a swift rebound in sterling, which is undervalued relative to its purchasing power parity level of around GBPUSD 1.58 and EURGBP 0.82.
UBS is recommending global investors with limited exposure to the UK to cautiously add exposure to the pound as a cheap sterling presents long-term buying opportunity.
Given the uncertain environment and high volatility, Haefele said it is still too early to take large positions. 'After the resignation of May our bias is to buy the dips below USD 1.24 and start unwinding hedges as soon as the political situation allows,' he noted.
Meanwhile, for global investors with existing exposure to UK assets, the Swiss lender is recommending a careful review of positions. Haefele said such investors should consider hedging to protect against further sterling weakness.
For UK investors with a significant home bias, diversified dividend stocks are likely to outperform the rest of the UK market, he added.
Aside from this, the CIO said UK investors face competing challenges: ‘Sterling weakness may benefit the UK large cap equity market. However, rising risk premia related to policy uncertainty or a significantly stronger pound could cause UK large caps to underperform their global peers,’ he explained.