IPS Capital: A run on the pound
Our basic investment thesis at the start of the year was that the simple recovery trade that characterised 2009 was most likely over. We thought 2010 would prove more choppy and a simple long equities approach might not generate much return over the year whilst generating a fair amount of volatility (a strategy of return free risk). Our largest sector allocation (32.5%) was therefore to trading strategies that we believe can profit in both rising and falling markets. For the first two months our general market view has played out and our clients have made money whilst the FTSE-100 was down -1.1% through to the end of February. Where we do have equity exposure our recent focus has been on large cap, global names. Given the strength of the investment grade corporate bond markets we believe these companies will be easily able to fund themselves even if risk aversion rises (unlike many of the weaker governments). Their global nature also gives our clients access to some to the faster growing Asian (and other) emerging markets.
Our other profitable move for February was to increase our US Dollar exposure for our Sterling based clients. Fears of a hung parliament, confirmation from the Bank of England that further quantitative easing remains possible and technical factors (most notably Prudential’s bid for AIG assets) conspired to generate a run on the pound. For a variety of reasons we do not think the UK is in as much trouble as Greece. While we think Sterling weakness could be around for a while (perhaps until the uncertainty of the election result is behind us) we will be looking to take our profits on this position and move back to being broad Sterling neutral.
Jonathan Blain, IPS Capital