Chart of the week: Sterling looks undervalued
Foreign investment should return
The risk of a no-deal Brexit hasn’t quite reduced to zero. But with sentiment towards the UK economy near all-time lows, further downside looks limited for sterling and UK assets. Our analysis shows that the extra compensation investors are demanding for the risk to future UK earnings remains near an all-time high, and more than it was during the global financial crisis. While there are some company-specific risks, markets seems to be pricing in an overly pessimistic outlook. A sharp rise in the pound on any positive economic or Brexit surprises might initially hurt the relative performance of UK multinationals. But we believe it could encourage foreign investors (who have fled the UK) back in.