(Adds fund manager quote, details)
By Anirban Nag and Kit Rees
LONDON Oct 4 Sterling slid to its lowest in
more than three decades on Tuesday on fears of a "hard Brexit"
from the European Union and its single market that could hurt
the economy, although the weaker pound sent UK stocks surging.
The pound has already lost 1.7 percent against the U.S.
dollar since Prime Minister Theresa May said on Sunday the
formal process to take Britain out of the EU will start by the
end of March 2017. On Tuesday, she added the divorce from the EU
will not be "plain sailing" and that there would be "bumps in
Many economists and investors fear May's government will
back a "hard Brexit" option where Britain quits the single
market in favour of imposing controls on immigration.
That could hinder inward and outward trade and constrict the
foreign investment needed to fund Britain's huge current account
deficit, one of the biggest in the developed world.
Economic activity has held up better than many had expected
since Britons voted in a June referendum to leave the EU, but
many policymakers are anxious about the prospects for future
investment. The Bank of England launched a big stimulus package
in August and may ease policy again in coming months, which
could drag the pound still lower.
"Most of the key (BoE) members have expressed a willingness
to continue acting pre-emptively ... and an expectation that
more easing is likely to be necessary," UBS strategist John
"Additional stimulus would likely drive further sterling
weakness," he said, reiterating the bank's forecast for $1.20
per pound and parity with the euro by end-2017.
The pound fell to $1.2735, its weakest since
mid-1985. Earlier, sterling also hit a three-year low of 87.65
pence per euro and a 6-1/2 year low on a
The nervousness in the spot market led to a rise in the cost
of hedging against sharp swings in the currency in the next
three to six months. The cost of hedging sterling exposure
against the dollar for six months -- which includes
March, when May says Brexit will begin -- was at 10.60 percent,
the same as the nine-month option. Typically a nine-month
currency option is dearer than a six-month one.
UK PLC SOARING
In contrast to the gloom and doom in the currency market,
investors in British stocks were in a far more cheerful mood,
highlighting a divergence in sentiment towards UK assets.
With a cheaper currency promising to bolster earnings and
enhance competitiveness, Britain's FTSE 100 index rose
above the 7,000-point level for the first time since mid-2015.
The blue-chip index has risen more than 11 percent since its
pre-Brexit level and is within striking distance of its historic
high of 7,122.74.
Even more heartening for investors has been the rise in the
domestically exposed FTSE 250 index of mid-sized British
firms, which struck a record high and has gained around 24
percent since the lows struck just after the referendum result.
The mid-caps have benefited from recent upbeat data and
surveys of British households and businesses that have led many
forecasters to drop predictions the economy will slip into
recession this year. JPMorgan, for example, doubled its
third-quarter GDP forecast to an annualised 2 percent last week.
"Given the fact that we've not seen a significant negative
impact on the economy as of yet, it's not surprising to see some
of those domestic stocks recover from their lows," said Neil
Veitch, manager at the SVM UK Opportunities Fund.
"I think what is much more difficult to ascertain is just
how the UK economy holds up while these negotiations are ongoing
and what comes out of those negotiations, because it's not going
to be a terribly simple process."
Analysts and fund managers like those at Franklin Templeton
also cited the prospect of more acquisitions as foreign buyers
take advantage of a cheaper currency to scoop up UK companies.
"There's certainly a perception that, as you go down the
market cap range, the potential list for takeover targets gets a
bit longer," said Ian Williams, economist and strategist at Peel
Hunt. "And, of course, for foreign investors who are looking at
sterling-denominated assets, they are continuing to get a bit
(Writing by Anirban Nag; Editing by Ralph Boulton)