In fact, I initiated a pretty interesting trade a while ago that I expect to pay off handsomely over the next year, and I thought this was a good time to share it.
Because of a round of elections that has just begun in Europe.
First, this past weekend, France held a preliminary presidential race. And for the first time in history, the two most-popular candidates were NOT from the country’s two major parties. They will now face each other in a run-off taking place on May 7.
|French stocks climbed 4.1% to a two-year high Monday. This was the CAC 40’s biggest one-day gain since 2012.|
Emmanuel Macron, a relative newcomer and pro-European centrist, is currently the frontrunner. But he was trailed very closely by Marie Le Pen, the leader of the Front National Party and a strong advocate for France breaking ties with the European Union.
At this point, most people now expect Macron to pick up most of the votes from contestants that are dropping out of the race. This is why the euro currency as well as French stocks rallied yesterday.
However, I think there is still the chance for a surprise upset by Le Pen … just like the initial “surprise” that we saw with the Brexit vote last year.
That brings me to another important vote taking place in the UK on June 8. It’s happening because the country’s Prime Minister, Theresa May, recently called for a surprise snap general election.
Thematically, both elections are really about the same thing — the purpose and importance of the European Union.
And in the UK’s case, I expect voters to further voice their support for a split.
Which is why I like the prospects for the British pound sterling going forward.
As I said, I already have skin in the game myself. Specifically, through a position in the CurrencyShares British Pound Sterling ETF (FXB).
I originally purchased this fund, which aims to mimic the effect of holding pounds sterling outright, after the initial post-Brexit-announcement plunge last year.
As such, I’m still a bit underwater. But I’m optimistic that I will be rewarded nicely over the longer term, with relatively modest downside risk.
Again, I should note that this investment doesn’t produce any income. In fact, the ETF actually carries an annual expense ratio of 0.4% a year. That’s a cost you wouldn’t bear if you simply changed some dollars for pounds outright.
All that said, I believe the pound will ultimately return to the level it was at before the Brexit announcement … at a bare minimum. That might equate to a 15% gain, with the possibility of much more upside from there. Heck, the pound was about 30% higher than current levels just three years ago!
Take a look at this chart of the FXB and you can see the opportunities pretty clearly …
If the pound breaks out above $1.30 at any point, I think its return to the pre-Brexit announcement exchange rate of $1.40 would be extremely swift.
That would be a double-digit gain from current levels on its own.
But then look what happens if the pound ultimately returns to its normal trading range over the last decade — you’re looking at pounds trading between $1.50 and $1.60 ever since the financial crisis hit in full force.
That equates to big upside from today’s exchange rate. And all it would take is a return to any sense of normalcy in the UK.
Please realize: We are talking about absolutely massive swings in the world of first-world, major economy currency pairs.
You do not normally see the chance to earn 30% in this kind of market.
And, hey, I could get crazy and point out that the pound was trading at $2 a share before the 2008-’09 crash!
On the other hand, what is the downside from here? The pound trading at parity with the U.S. dollar?
I don’t see that happening.
So here’s my view with these two rounds of elections on the horizon …
I have always considered the euro to have far more risk baked into it relative to the pound.
And while the initial results in France are now putting a bid behind the euro, I haven’t changed my view on that.
Even if Le Pen loses, there are other European countries in dire financial straits and additional member countries — currently using the euro — looking for exits of their own.
Meanwhile, a year later, only one major financial firm has even announced its intention to leave the UK for greener pastures (Lloyds of London). And foreign investments continue to pour into the country.
Prime Minister May’s surprise call for a snap general election vote in June should now seal the deal one way or the other.
And if by some chance the vote rewinds the Brexit to some degree … well, isn’t that supposedly a positive for the pound, too?If it gives the UK more certainty and a more-united front as it sits down at the negotiating table with the EU, that’s a positive for the pound.
My point is that we already know what sterling did in the wake of the Brexit surprise. And while it caught a bit of a bid after May’s announcement, it’s still pretty low by historical levels.
Therefore, I think smart investors should start thinking about what the pound might look like another year or two from now … no matter which way the June election goes.
From where I sit, sterling has a good chance of regaining some of its shine.
The Guggenheim CurrencyShares British (NYSE:FXB) was trading at $124.82 per share on Tuesday morning, up $0.18 (+0.14%). Year-to-date, FXB has gained 3.79%, versus a 6.75% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of Uncommon Wisdom Daily.