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U.K. Investors Brace for Falling Pound Following General Election

Thursday’s U.K. general election has hedge funds and mutual fund managers positioned for a fall in the country’s currency, even as they expect the Conservatives to prevail.

  • Joe McGrath

Investors and fund managers are anticipating that Thursday’s U.K. general election results will trigger a fall in sterling when markets open Friday, despite their confidence in the ultimate outcome.

While fund management firms expect a Conservative Party win, they think the result will not be as emphatic as polls had predicted when the election was announced in April, which may lead to a fall in the British pound. Prime Minister Theresa May called for an early general election on June 8 — ahead of the regularly scheduled election in 2020 — in a bid to win more Conservative seats in Parliament. With the current Conservative majority of only 17 seats in the House of Commons, May has less power to negotiate the terms of the U.K.’s exit from the European Union than she would like. A number of Conservatives are seeking a so-called hard Brexit, or a swift and total withdrawal from the EU. May is seeking a softer Brexit, which she deems less likely to harm the U.K. economy, according to reports.

Philippe Ferreira, head of hedge funds research at Lyxor Asset Management, wrote in a report on Tuesday that macro hedge funds on the Lyxor platform were net short sterling. His report said macro hedge funds had added to their short sterling positions going into the vote, “at a time when opinion polls narrowed and expectations that the Tories would significantly reinforce their majority in the House of Commons vanished.”

Tom Elliott, international investment strategist at financial consultancy deVere Group, said in a report he thinks there is a 55 percent chance the Conservatives will have a majority of fewer than 60 seats in the House of Commons, which could lead to some volatility in the pound. (In the U.K. a party has to win 326 seats to win an outright majority; if it cannot do so, the largest party can form a government by sharing power with another party, as the Conservatives and the Liberal Democrats did in the coalition government of 2010.)

“Should this happen, sterling would wobble, and would fall sharply if that majority is below 40 and Theresa May is again beholden to the hard Brexit lobby of Tory MPs,” he wrote. “The FTSE 100 would rally as sterling falls, U.K.-focused stocks weaken and gilt prices would rise (and yields fall) in anticipation of a weaker economy.”

Alastair Gunn, a portfolio manager at Jupiter Asset Management, added in a report to clients that “sterling was having a tough time” ahead of polling day.

Investor reactions follow an opinion poll published Tuesday by pollsters at Survation that suggests the U.K. may be heading for a hung parliament — where no party has a clear majority.

The poll of more than 1,100 U.K. residents over the age of 18 , conducted on June 2 and 3, suggests the Conservative lead — measured as high as 16.6 percent on May 9 — could be less than 2 percent.

At the beginning of the election, poll data was being treated with caution because predictions of the outcome from the U.K.’s EU referendum and the U.S. election result proved to be wide of the mark.

However, market observers at Schroders think polls are still influencing how investors are positioned. Azad Zangana, senior European economist at the British fund management firm, says the company is anticipating a Conservative majority, but the size of the increase is now difficult to predict.

“If it is only a small increase, that could hurt sterling,” Zangana says. He says the election was originally called to strengthen May’s hand against backbench members of Parliament who would like to pull out of the EU immediately. “That sort of 50-seat majority is the magic number; if they manage to get over that point, we can see more investor optimism,” he says.

Not all fund managers expect sterling to fall, however. Stefan Kreuzkamp, Deutsche Asset Management’s chief investment officer, published a statement Wednesday saying the pound would probably strengthen, based on the company’s “base case” of a “stable or increased Tory majority.”

Elliott acknowledged that any Conservative majority that extends beyond 60 would be welcomed by currency speculators, sending sterling upward. He said investors would see a large majority as allowing May to ignore the “estimated 30 or so” members of her parliament who want to divorce the EU on the hardest terms.