Theresa May is no Margaret Thatcher
But Sterling is an interesting investment
After Brexit the Pound collapsed. The reason for the collapse is that Britain will have to redirect the flow of goods and capital after departing the EU. Most pundits see this as a negative for Britain.
Theresa May became Prime Minister after Brexit because David Cameron put his reputation on the line and lost. Now, the vote was a shock to the status quo but not a shock to observers of the EU. The EU is mismanaged, corrupt and static. In short, the EU and the Euro are failures. Britain always had reservations towards giving up sovereign power to a corrupt EU central authority. Viewed from this perspective, Brexit is a logical conclusion of decades of mistrust, frustration and political wrangling amongst Britain’s leaders.
We believe Britain is in a similar situation like in the early 80s, when the country had to pivot from an industrial collapse into something new. Margaret Thatcher did the transition and she succeeded. Theresa May is no Thatcher but she has a shot in making a similarly successful turn around. We believe the British Pound is an interesting investment. However, there are massive trade flows currently that need to wash out. Positions need to be closed and leverage has to be sucked out of the system. Hence, we are not buying the GBP yet. Particularly, after October 6th, when the Pound flash crashed down to 1.18 GBP/USD we are convinced that there is still massive delevering on trading desks going on. Until those positions are cleared the Pound will not trade on fundamentals but on trading flows, and short term demand/supply will reign.
Fundamentally we see the GBP as an interesting investment.
Here are some thoughts:
First, lets list the reasons for why Britain should suffer after Brexit.
- Less access to the EU market
- Less free travel and work between citizens of the EU and Britain
Factor 1 is listed as the main factor for the pounds collapse. The reasoning is that Britain will face tariffs and hence will be able to export less. The problem with this argument is that Britain already has a negative trade balance with the EU, i.e. Britain already exports less than it imports. So tariffs and trade wars with the EU will hurt the EU more than Britain, since the EU is exporting more to the UK than vice versa.
Factor 2 impacts London as a financial center. The reasoning here is that if French or Italian expats can’t freely work in Britain, than London will loose it’s status as a financial center. My counter argument is that if those folks don’t get visas they will loose the status of financial wizards in London but London will continue to be the center of finance outside of New York.
I can’t believe that even normal people like FT journalists are propagating this idea that without free work visa London will decline as a center. London has been a financial center for centuries. It survived World Wars and almost communist Labour governments. The reason London is the №2 financial center is because it has an amazing infrastructure, principled regulators and a free currency. London also dominates the Eurobond market. The first Eurobond was arranged by London Merchant bankers and it was for the Italian Autostrade. Now, do you think Autostrade will issue future bonds in Rome or Frankfurt or Paris? I don’t. My belief is that London will not only remain strong, it will even gain relative strength versus the EU.
The EU is a restrictive politically driven organization. No matter how rational and well intentioned its leaders are, they will always fall prey to political wrangling.
If the EU wanted to go strong after London and create a competitive marketplace they’d have to do three things:
- Decide where to put the new financial capital
- Create a thriving environment for bankers to issue large debt and stock, in particular set a longterm regulatory framework that balances the tension between free enterprise and exuberance.
- Welcome foreign workers in financial system, make them feel home and let them develop whatever system they need to maintain a thriving financial center.
I don’t think any of those three points are realistic.
What is more probable? That the EU can execute on all those three factors or that London keep its century old status as a financial center? I don’t see this question as very complicated to answer.
The GBP is currently under a lot of pressure since Brexit has triggered an unwind of massive positions. This unwind is not over yet, as the flash crash has shown in early October. Longterm the GBP is an attractive currency because it is very low now and the EU and the Euro are on much weaker footing than Britain. The most forceful argument for the EU and the Euro to stay together is that its current members are scared of changing the status quo. That is not sustainable. Britain has done the right thing and exited this failing structure.