GBP benefited from a classic dead-cat bounce when the BoE opted to defer its policy response to Brexit in July. The rally was short-lived as the BoE kept its word and delivered a comprehensive package of measures at the subsequent meeting last week.

GBP has since fallen by 3% and the index is close to setting a new post-Brexit low. This latest phase of the sell-off brings the cumulative decline in GBP to 18% since November.

The risks to the new forecasts remain skewed to the downside in the event that foreign investors require even more of an FX risk premium to compensate for the accelerated decline in UK yields and the extended period of economic uncertainty related to the terms of the UK’s separation from the EU.

Road map for going forward:

Non-fins come under pressure on Brexit

We started this trade a few months back as a hedge against Brexit but now we believe that the volatility surrounding the upcoming negotiations is likely to hurt the financials basket once again.

In our stance, the GBP trades have become extremely directional and dependent on the risk aversion/appetite balance and while we believe it is likely that the summer months remain relatively stable, waiting for firm developments to happen.

Who has to hedge what?

Telecom services: Modest impact on GBP exposures. Relatively resilient although the risk of slower growth. Certain costs (handsets, TV programming) pressured on weaker GBP. BT pension deficit rise should be manageable, aided by EE consolidation.

Media: Negative impact on UK-based cyclical names exposed to advertising such as ITV. Sky’ subscription-based business model more resilient. Positive impact on global publishers such as Pearson, Relx.

Utilities: Although a little impact on FX, the UK-regulated names have limited volume/price risk and benefit from higher inflation/lower bond yields, weaker sterling boosts UK energy prices and overseas earnings. A less green energy policy or removal of the carbon price floor would be negative.

Pressure for a second Scottish referendum creates negative uncertainty. Dong Energy is exposed to a change in wind subsidies, other European names have limited (<20%) exposure to the UK.