No happy new year for the battered pound, if you ask Pacific Investment Management Co.
After profiting last year from sterling's steepest slump since the global financial crisis, the money manager is betting on the drop extending well into 2017 amid political uncertainties and a current-account deficit. The pound has fallen more than 17% against the dollar since Britain voted out of the European Union in June and touched a 31-year low in October.
Sterling remains attractive to sell even as it's now undervalued by about 5% based on purchasing-power parity, according to Thomas Kressin, portfolio manager at PIMCO, which managed $1.55 trillion of assets at the end of September 2016.
“The pound has one of the worst current-account deficits in the developed world and remains vulnerable to Brexit headline risks,” Munich-based Kressin said in a phone interview. PIMCO made “good money” last year by being “underweight” the British currency, he said.
The pound fell to as low as $1.2039 this week amid concern the U.K. is headed for a so-called hard Brexit, which could see the nation seek to regain control of immigration at the cost of having to quit Europe's single market, as the government's self-imposed March deadline for triggering Article 50 of the Lisbon Treaty approaches.
The British currency rose 0.4% to $1.2267 as of 2:51 p.m. in London. It lost 16% against the dollar and 14% versus the euro last year, the most since 2008. The U.K. had a current-account deficit of £25.5 billion ($31.3 billion) in the third quarter of 2016, according to official data.
HSBC Holdings PLC forecasts sterling will drop to as low as $1.10 if the most severe exit option is pursued. The median estimate in a Bloomberg survey of forecasters is for the currency to slip 0.7% to $1.22 by mid-2017 and then to recover modestly to $1.25 by year-end.
Given elevated political risks, PIMCO is running a tighter risk budget on active currency strategies and isn't holding positions in the euro despite seeing the single currency as undervalued. Political uncertainty in the region won't be limited to the Brexit process, and the market is now starting to focus on French elections due in April, Mr. Kressin said.
“It is very hard to put a price on political risk,” he said. “This is all unprecedented. Last year's events proved how hard this is. I am not sure that even those who called Brexit and Trump right made money.”