(Bloomberg) -- The pound is on a record losing streak and there aren’t many investors ready to stand in the way of further losses.
Investec Asset Management, Aberdeen Standard Investments and Pictet Asset Management SA are cutting sterling positions or staying on the sidelines as Britain’s political turmoil reignites uncertainty around the nation’s exit from the European Union. With a senior minister resigning to add pressure on Prime Minister Theresa May to abandon her deal with the EU and quit, the risk of a disorderly Brexit is back on the radar.
Sterling slid to a four-month low near $1.26 Thursday and is on the longest losing streak on record versus the euro amid concern that May’s successor could take Britain out of the bloc without a deal or call an early election. Brexiteer and former Foreign Secretary Boris Johnson is seen as the top contender, and also the least market friendly.
“We have lower pound weights than at any time in the last eighteen months,” said Andrew Cole, a fund manager at Pictet Asset, which oversaw $491.5 billion as of December. “May’s departure is priced in but I’m not sure the market is ready for Johnson.”
Andrea Leadsom resigned as leader of Parliament’s lower house late Wednesday, ramping up the pressure on May, while the Conservative Party is expected to get routed in Thursday’s European elections. The head of an influential group of backbench lawmakers, Graham Brady, told reporters he would meet with May on Friday. Polls during the EU election campaign indicate that the Conservative Party could get less than 10% of the votes, while Nigel Farage’s Brexit Party is expected to come out on top.
After leading Group-of-10 currency gains in the first four months, sterling has slid to the bottom of the pack in May. It has slumped 15% since the Brexit referendum almost three years ago. U.K. government bonds have rallied as investors seek a haven, with 10-year yields breaking below 1% Thursday for the first time in seven weeks.
“May’s latest political gamble has failed, which leaves markets questioning the shelf life of her premiership. It could be hours, days or weeks, but it seems like the Brexit math is likely to shift,” Toronto-Dominion Bank strategists led by Richard Kelly wrote in a note.
Pictet’s Cole and Investec Asset Management portfolio manager Russell Silberston both see the currency testing 2016 lows below $1.20 should the odds of no-deal Brexit or a general election continue to build.
In the short term, the only things that could work in sterling’s favor are any gains for pro-EU parties in this week’s European elections or May’s Brexit plan getting through Parliament, said Silberston. He closed out his pound positions in February and is now staying neutral.
“The market’s focus is already turning to what happens after PM May,” said Fritz Louw, a foreign-exchange strategist at MUFG Bank Ltd. “We continue to see further downside potential for the pound even after the recent sharp sell-off.”
The longer-term picture is murkier, given risks including a no-deal Brexit and a snap election.
A vote could lead to a Labour government led by Jeremy Corbyn, with investors wary of his plans to increase borrowing and government spending. Revoking Brexit on the other hand would be pound-positive, with strategists previously predicting the currency could rally to $1.50 on ‘no Brexit.’
For Aberdeen Asset’s Luke Hickmore, the choice is increasingly coming down to either no deal or no Brexit. He sees the next prime minister eventually getting trapped in the same Parliamentary deadlock that May faced, boosting the risk of a disorderly exit and fueling pound losses.
Hickmore sees a possibility that Parliament will eventually vote to revoke Brexit, and expects sterling to stabilize around $1.30-$1.35 -- but he’s still not confident enough to take a bet on it.
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