“Overbought sterling losing its lustre as UK competitiveness wanes”, says Luca Paolini, chief strategist at Pictet Asset Management.
“Sterling’s rally does not look sustainable in the medium-term and we’re tactically underweight. Despite its year-to-date performance and strength over the past 5 years, over the long term, sterling has been trending down due to a combination of relative weak growth and higher inflation.”
“We’re keeping an overweight position on UK equities as a cheap value play. The recoupling between sterling and UK equities will likely continue via an outperformance of UK equities against global equities and a re-rating of UK equities versus their European peers.”
“Over the long-term, UK and Euro-area equities trade at the same multiples but now the UK trades at a 15% discount on 12m forward P/E, after hitting a pre-Brexit referendum record 20% premium.”
“The long-term fundamentals remain unsupportive for sterling. The UK twin deficit is among the worst in the world, the UK is losing competitiveness and after the recent rally, valuation against other non-USD currency looks unattractive.”
“While sterling still trades below our estimate of fair value against the US dollar, any upside is likely to be capped as more than 5 rate hikes by the BOE are already priced in for the rest of the year”.