The British pound looks “vulnerable” to further declines, and a looming recession could have “serious” implications for British society, according to billionaire trader Chris Rokus’ hedge fund firm.
Ruckus Capital Management, which manages about $14.5 billion in assets, told its investors that the UK has suffered a bigger shock to its terms of trade than other developed countries due to the impact of Brexit, deglobalization and the coronavirus pandemic.
Such a deterioration, which compresses an already ballooning current account deficit and could fuel inflation, makes it harder for policymakers to control consumer price growth, the company wrote in a letter seen by the Financial Times.
“The recession needed to tame inflation in the UK is deeper than needed anywhere else, with potentially serious societal repercussions,” she said. “The pound sterling looks weak.”
Ruckus declined to comment further.
The dismal prognosis comes after a number of high-profile fund managers targeted the UK market. Crispin Odey, founder of Odey Asset Management, was among the traders who took advantage of the pound’s fall in September after ex-adviser Kwasi Quarting’s “mini” budget for unfunded tax cuts.
Rokos, one of the world’s largest macro hedge funds, benefited during the UK gold market crisis in September, thanks to bets that UK borrowing costs would have to rise.
Sterling has fallen more than 10 percent against the dollar this year and fell to an all-time low of $1,035 in the wake of Quarting’s financial statement. Since then it has rebounded strongly to around $1.21, its highest level since August.
Compounding the problem for Britain is the “disproportionate negative” hit that mortgage holders will take from higher interest rates, because fixed-rate home loans in the UK tend to expire more quickly than in other countries, such as the US. This could mean that the Bank of England raises interest rates “very slowly to contain inflation,” Roccos writes.
Rokos’ warning follows very bearish expectations from a number of other big-name managers. Paul Singer’s Elliott recently warned that the world is on its way to “hyperinflation” and could be headed for its worst crisis since World War II, while Saba Capital founder Boaz Weinstein said global stocks could enter a decades-long Japan-style bear market. .
Rokus, former co-founder of hedge fund firm Brevan Howard, has gained about 44 percent in his fund so far this year. This puts it on track for its best year of performance since its launch in 2015 and to recoup big losses incurred last year after it suffered a sharp move in short-term bonds.
Its gains this year come during a fruitful period for macro hedge funds, many of which have been able to cash in on the massive rise in government bond yields globally as central banks raise interest rates to try to combat soaring inflation.
To be more optimistic about the UK’s outlook, Roccos said, it would have to see “signs of a softer Brexit”, or higher immigration.
He also warned that with recession a “necessity” in order to tame inflation and turn liquidity into a viable alternative investment for financial assets, global stock markets appear “vulnerable” to further declines.
She wrote that since there are “essentially fewer resources available and more investment required, the expected returns must be higher”. This means that “asset prices should be lower”.