Pound a ‘Screaming Buy’ as U.K. Attracts Investment (Update2) By Matthew Brown and Ye Xie May 18 (Bloomberg) -- The pound’s 20 percent drop in the past year made Britain the first choice when Schroders Plcstarted buying real estate in Europe last month. “Weaker sterling makes U.K. property more attractive,” said Neil Turner, the Wiesbaden, Germany-based executive in charge of the money manager’s new 300 million-euro ($403 million) property fund. “The U.K. property market is a screaming buy compared to rivals in continental Europe.” While the Bank of England said it expects a “protracted” economic recovery in the U.K., where unemployment is the highest since Prime Minister Gordon Brown’s Labour Party came to power in 1997, investors from Millennium Asset Management to Mellon Capital Management Corp. are betting the pound’s decline is coming to an end. Strategists at New York-based Citigroup Inc. said in a report last week the pound is “among the most undervalued major currencies,” trading almost 15 percent below “fair value” versus the dollar. Barclays Plc predicts it will rise as much as 18 percent against the dollar and 11 percent versus the euro in the coming year. Goldman Sachs Group Inc. sees a 23 percent gain versus the dollar and 15 percent advance against the euro. Money is already pouring into Britain. Currency flows into the pound from pension funds, insurers and other institutional investors in the 60 days to May 13 were more than 99 percent higher than any comparable period since 1997, according to Boston-based State Street Global Markets LLC, the world’s second-largest custodian of financial assets, with $11.3 trillion. ‘Extreme Undershoot’ “There was an extreme undershoot of sterling versus the euro during the financial crisis,” said David Powell, a currency strategist in London at Bank of America-Merrill Lynch. “The risk of implosion for the financial system has largely passed, sparing the U.K. economy and sterling.” The pound strengthened 0.8 percent to 88.23 pence per euro as of 10:03 a.m. in London, taking its advance this month to 1.4 percent. Against the dollar it rose 0.5 percent to $1.5254, a 3.1 percent gain since the end of April. The currency appreciated 3.3 percent last month against the dollar, the biggest gain since soaring 5.1 percent in the same month of 2006. Investors are turning bullish on sterling as the slowdown in the U.K. economyshows signs of abating. Gross domestic product contracted at a 4.1 percent rate in the first quarter, the most since Margaret Thatcher was prime minister in 1980. House Prices British house prices rose in March following a 16-month decline, according to Nationwide Building Society. Manufacturing fell at the slowest pace in more than a year in March, the Office for National Statistics said. Retail sales increased 6.3 percent in April from a year earlier, British Retail Consortium data show. U.K. home sellers raised asking prices by 2.4 percent in May from April, the most in more than a year as buyers’ access to mortgages improved and the number of properties for sale dwindled, Rightmove Plc said today. A Citigroup index measuring economic surprises in the U.K. climbed to 64 on May 15, from a 2 1/2-year low of minus 68 in January. The index gives a positive reading when data surpass economists’ expectations. The average reading for the Group of 10 developed nations was 29. “The U.K. will actually exit the downturn on the earlier side,” said Robert Blake, head of strategy for North America in Boston at State Street. “The pound is undervalued.” Hardest Hit Sterling tumbled as much as 36 percent since reaching a 27- year high of $2.12 in November 2007, three months after losses on bonds linked to subprime mortgages started to freeze credit markets and plunged the global financial system into the worst crisis since the Great Depression. U.K. companies have been among the hardest hit. BT Group Plc, the country’s largest phone company, lowered its dividend on May 14 to 6.5 pence from 15.8 pence after posting a fourth- quarter loss of 977 million pounds and said a further 15,000 jobs will be cut this year. Any recovery may be stunted by Britain’s dependence on the financial industry. Banks and insurers, which account for about 10 percent of the economy, are eliminating about 29,000 jobs in London this year, the Centre for Economics & Business said. The budget deficit will swell to 12.4 percent of GDP this year, according to government estimates, and U.K. banks had $8 trillion of foreign-currency loans outstanding as of March 2008, the most in the world, Citigroup said May 7. The figure quadrupled since 2000. London Versus Paris “The high amount of leverage will take several years to clear out,” said Hans-Guenter Redeker, global head of foreign- exchange strategy in London at BNP Paribas SA, France’s largest bank. “Sterling is going to come under pressure once again and current levels in euro-sterling are a buying opportunity.” The pound will weaken to 96 pence per euro, according to Redeker, who said he will abandon the forecast if it strengthens to 88.6 pence. Schroders chose the U.K. for its property fund after the currency made British commercial real estate cheaper relative to the rest of Europe, helping boost yields, after accounting for foreign-exchange conversions, Turner said. Yields in the U.K. “have adjusted upwards by 250 to 300 basis points across many parts of the market,” he said. “While we’ve seen some adjustment in Europe, you haven’t seen it to the same extent.” King’s Forecast The average price of London office real estate declined to 8,020 euros per square meter last quarter, from more than 22,500 euros in mid-2007, according to CB Richard Ellis Group Inc., the biggest commercial property broker. By contrast, Paris rates fell to 12,480 euros from about 24,000 euros. That difference would be less than 2,000 euros per square meter if not for the pound’s decline, CB Richard Ellis says. London office prices would be 10,930 euros per square meter if the currency had remained at its January 2007 level of 67.57 pence, it estimates. “The fall in the exchange rate has made assets of all kinds in the U.K. more attractive to people overseas,” Bank of England Governor Mervyn King said on May 13. “We are seeing that in the property market, and I suspect we will also see it in terms of people thinking which businesses to purchase. That’s one of the stimulatory consequences of a lower exchange rate.” Goldman Sachs is bullish on the pound against both the euro and the dollar because “relative financial conditions and valuation” are “big drivers,” in currency markets, Dominic Wilson, the firm’s senior global economist in New York, wrote in a research note on May 10. The U.K.’s economy is likely to contract 0.4 percent in 2010, while Germany’s, Europe’s largest, will shrink 1 percent, the International Monetary Fund said on April 22. Buy the Pound Goldman Sachs recommends its clients buy the pound versus the dollar as one of its top trades this year, targeting $1.65. Barclays said the currency will rise to $1.73 and 82 pence per euro by year-end. Credit Suisse raised its three-month forecast on May 12 to 84 pence per euro from 93 pence and told investors to sell the euro versus sterling as a “tactical trade.” Trading patterns suggest the pound may strengthen to 87.48 pence per euro before it meets a so-called resistance level, according to technical analysis using Fibonacci numbers. That level is a 50 percent retracement of a decline that started on Oct. 20 at 76.94 pence and ended on Dec. 30 at 98.03 pence. If sterling breaks through that level, the next area of resistance is the 200-day moving average, currently 86.45 pence. “The huge monetary easing and the 30 percent depreciation of the pound make the U.K. better off on the road to recovery, compared to many other countries, particularly Europe,” said Richard Benson, who oversees $14 billion of currency funds at Millennium Asset Management in London. Hedge Funds Hedge funds and other large speculators reduced wagers on a drop in the pound to the lowest level since August 2008, according to the Washington-based Commodity Futures Trading Commission. The difference in the number of bets on a decline and those on a gain fell to 22,437 on May 5, from 49,359 in September, the most since the CFTC started compiling the data in 1992. “The pound is cheap,” said Jonathan Xiong, who has been betting on sterling’s recovery in the $18 billion he oversees as vice president and senior portfolio manager at Mellon Capital in San Francisco. “The euro-zone is lagging as far as the recovery goes. They are behind.” To contact the reporters on this story: Matthew Brown in London atmbrown42@bloomberg.net; Ye Xie in New York at yxie6@bloomberg.net.
Monday, 18 May 2009
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