Sterling on track for parity with both dollar and euro, says investment veteran

Key Points
  • Sterling set for further Brexit-related falls, says financial advisor
  • UK domestic politics will remain highly unpredictable and ineffective
  • UK equities will be fine but the outlook for sterling and gilts is less optimistic

The British pound is highly vulnerable and on course to trend towards parity with the U.S. dollar and the euro, Beat Wittmann, partner at Porta Advisors, warned on Thursday.

Chaotic domestic politics are the key reason for Wittmann's pessimistic outlook, with the financial advisor accusing Prime Minister Theresa May of remaining "incompetent, ignorant and selfish".

"U.K. domestic politics will, for the foreseeable future, remain highly unpredictable and ineffective, creating a steady erosion of consumer and investment confidence and ongoing uncertainty for businesses including the City," predicted Wittmann, speaking on CNBC's Squawk Box and in further thoughts sent via email on Thursday.

Anticipating a very difficult period ahead for the U.K., the industry veteran says nothing particularly constructive is likely to happen in Brexit negotiations until the prime minister is replaced.

"May is a spent force with (foreign secretary) Boris Johnson or (Brexit minister) David Davies likely to replace her within next few months. This will be perceived very, very negatively by the European Union (EU) and global investors and will be followed by new elections within the next 12 months," posited Wittmann.

"Labour party leader Jeremy Corbyn could potentially win such an election which would make matters worse still," he continued.

Brexit and its ongoing fallout is to blame for the electorate's latest display of disappointment with the country's politicians, as the fallacies inherent in pledges made during the campaigns preceding the referendum become increasingly obvious, according to Wittmann's thesis.

"The winners of that vote were basically selling taking control back and getting more prosperous at the same time. And now it will become clear step-by-step that that's not possible, that there's a price to be paid and that it's all about U.K. domestic policies and politics and power," he explained, saying the economy has been sidelined in the process.

"U.K. voters will only wake up to the cost of Brexit once the debt-fueled expansion ends and businesses start to relocate away from the country," he added, arguing with a decidedly downbeat tone that the country would then be forced back into the unenviable cycle of rising inflation and interest rates combined with economic contraction and a structural current account deficit.

Turning to the implications for U.K. assets, Wittmann forecasts that sterling will be the biggest victim.

By 2:00 p.m. on Thursday, the British currency was trading at $1.2655, down over 14 percent since last June's Brexit referendum and at €1.1339, down more than 13 percent over the same period.

"Gilts (U.K. government bonds) are more of a question of the reflation trade which has a global dimension so that's probably not so attractive and are fine. I think the main casualty will be pound sterling," Wittmann concluded.

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