The post-Brexit hangover? It's over.
The U.K economy is growing. This presents investors with a unique opportunity. Get long the British Pound.
The latest word from Great Britain is that inflation hit a two year high of 1.2% for the month of November (up from 0.9% in October). The country's third quarter GDP came in higher than expected at 0.5%.
This stands in stark contrast to the gloom and doom predicted in the direct aftermath of the E.U. referendum vote, in which the U.K. electorate resoundingly voted to leave the European Union. In an op-ed published in The Telegraph (one month before the June vote) Prime Minister David Cameron and Chancellor George Osborne wrote:
"The shock of walking out of Europe would tip the economy into reverse. This would be, for the first time in our history, a recession brought on ourselves: a DIY recession."
The prediction seemed plausible.
In the day following the E.U. referendum, London's FTSE 100 tumbled (the post-vote peak-to-trough decline was -5.6%). The U.K. 10-year bond yield hit record lows of 0.52%, in August, falling from 1.37%. The pound sunk to the lowest level since 1985. After recovering a bit, year-to-date the pound is down -13.7%.
With the U.K. economic outlook looking up, that presents an opportunity for investors. Here's Hedgeye CEO Keith McCullough in this morning's Early Look:
"We love #StrongDollar and we like the British Pound – its +0.2% vs. U.S. Dollar this morning to $1.27 (I like it long vs. Euros mind you) on a CPI print of +1.2% y/y for November versus +0.9% for October #InflationAccelerating as UK growth continues to confound the Eurozone bureaucrats."
Hedgeye Senior Macro analyst Darius Dale adds that our Growth Inflation Policy (GIP) Model has the U.K. economy trending in #Quad2 (growth accelerating, inflation accelerating) over the next three quarters. "As such, would expect the Bank of England to increasingly adopt a commensurately hawkish policy stance, at the margins," Dale writes. "The obvious investment implication here is to be long of the British pound – especially vis-à-vis the Euro."
Institutional investors are also overwhelmingly short the GBP. Take a look at the Chart of the Day below which shows non-commercial CFTC net futures and options contracts data of institutional investor positioning across a variety of assets.
As you can see, investors are net short by -75,083 contracts, a significant short position versus the 1-year and 3-year averages. In short, the crowded nature of this positioning implies there's room to run once a bottom in the pound is formed.
Bottom Line
The U.K. economy is accelerating, contrary to what London's elites predicted. That suggests it's time to buy the British pound.
