The sterling-euro exchange rate is now more or less at the same level as mid-March, when a vote to Leave was much less likely than it seems now, and the UK currency even has appreciated somewhat against the dollar. This suggests a Brexit vote is far from accounted for.
However, Ugo Lancioni, head of currency at Neuberger Berman, believes the Brexit risk is “partially priced in”, he said at the Expert Investor Luxembourg forum held on Thursday. This view is reflected in the allocation of the NB Diversified Currency Strategy fund, which has a slight overweight to sterling.
“Sterling will fall if the UK exits the EU, but if you look at the risk/reward picture, sterling is still slightly attractive,” he said. However, the recent momentum for the Brexiteers has made him a little more cautious. “Obviously we have changed our portfolios to take into account this change in sentiment.”
Hedging both ways
The question whether to take the Brexit risk into account in your day-to-day portfolio management doesn’t only affect fund managers. Fund selectors engage in this too, and they are deeply divided. While a poll in Madrid on Tuesday showed a small majority of local fund buyers have adjusted their allocations in relation to the Brexit referendum, most of their peers in Luxembourg haven’t taken any action.
Nicolas Simar, a European equity manager at NN IP, is in the camp of those who have been taking action. NN IP’s European High Dividend Fund reduced its allocation to UK equities earlier this year because of the Brexit question. “But we have now moved back from underweight to a more neutral position in UK equities as some stocks had already started to price in some risk,” he said. “Progressively, as more and more risk gets be priced in, we will see more opportunities [and increase our allocation further].”
But what about hedging your sterling exposure? After all, this is the asset class that so far has responded most strongly to fears over Brexit. However, as Lancioni pointed out, the cost of hedging sterling should make investors shy away.
“Implied volatility has been going through the roof because of this persistent demand for downside protection. Market makers have told me the implied annualised volatility is 60% now, an all-time record,” he said.