If Brexit doom and gloom mostly priced in, all eyes are on sterling which has become the Brexit barometer. So which way for sterling? Stating the obvious:

  • Prospect of any form of deal and GBP appreciates
  • Prospect of no deal and GBP depreciates

However, any prospect of an end to almost three years of uncertainty, and this could arguably could take some pressure of GBP too. In the event of a relief rally in GBP, how can investors position portfolios accordingly?

Translation effect

Recall that the GBP currency impact on portfolios in 2016 was massive. As GBP depreciated, investors whose global equity portfolios were unhedged enjoyed strong performance thanks to the translation effect of foreign earnings.  The same applied to FTSE 100 which looked stronger against a weakening GBP.

Investing in the UK: Time to pick up some Brexit bargains?

The reverse would also therefore be true. Any significant appreciation in GBP would see (foreign) global equity returns offset by GBP strength and would weigh on the FTSE 100. So for those who were lucky enough to be unhedged as sterling fell cannot rely on luck if sterling rises.

Toolkit for GBP recovery

Like everyone else, we have no crystal ball as to how Brexit could play out, but we can identify some of the tools that investors may want to have in their armoury to implement their views, whatever their risk posture, in case of a GBP recovery.

We look a selection of exchange traded products to access currency pairs, ultrashort bonds, shorter duration bond and GBP hedged equities to implement a tactical position for different risk levels.

  1. Short-term currency exposure

On the approach to and in the event of any deal, for very short term exposure (<1 month), investors could consider gaining rapid currency exposure by using a currency pair ETC and if seeking additional risk could use a leveraged exposure. Leveraged exposures should be short-term in nature and investors should ensure they understand the risks.

Currency pairs

ETFS Long GBP Short USDGBPP
ETFS 3x Long GBP Short USDLGB3

  1. Volatility dampener

Investors can tactically allocate to ultrashort GBP bonds if they are looking for a cash-like volatility buffer with more yield than cash with a GBP return profile.

Ultrashort duration Bonds

iShares GBP Ultrashort Bond ETFERNS
JP Morgan GBP Ultra-Short Income UCITS ETFJGST

  1. Short duration bond exposure

Tactical allocations to short duration GBP bond exposures is available both for UK gilts and GBP corporate bonds for investors seeking GBP bond exposure without being over-exposed to interest rate risk from the longer-duration nature of the main indices.

Short duration Gilts

iShares UK Gilts 0-5yr UCITS ETFIGSL
SPDR Bloomberg Barclays 0-5 Year Sterling Corporate Bond UCITS ETFGLTS

Short duration GBP Corporate Bonds

iShares £ Corp Bond 0-5yr UCITS ETFIS15
SPDR Bloomberg Barclays 0-5 Year Sterling Corporate Bond UCITS ETFSUKC

  1. Equities hedged to GBP

To access equities hedged to GBP, rather than running a currency overlay, investors can access GBP hedged versions of mainstream ETFs. At 29-30bp TER, these are slightly more expensive than their conventional versions, but the cost difference represents the cost and convenience of running the currency overlay.

Six ETFs to cushion against Brexit

Most regional equity ETF exposures offer GBP hedged versions, or investors can use ETFs tracking MSCI World (GBP hedged) as a proxy for risk assets. For example:

Global equities (GBP hedged)

iShares Core MSCI World UCITS ETF GBP HedgedIWDG
Xtrackers MSCI World UCITS ETF 2D – GBP HedgedXDWG

Conclusion

While no deal is supposedly ruled out, there is no certainty as to what any deal would look like. Whatever the politics, if you believe there is potential for a recovery in sterling, ETPs provide tactical ways of positioning portfolios accordingly.

Henry Cobbe is head of research at Elston Consulting