As a rare, public backer of Britain’s exit from the European Union, Jim Mellon stood out among investors in 2016. Now another breakup is being forecast by the chairman of the Burnbrae Group.
Mellon predicts that the euro would splinter within the next five years and the currency union will become a future casualty of a rising anti-establishment tide. Mellon was cited as a supporter of the “Leave” campaign by pro-Brexit lawmaker Michael Gove.
“Brexit is going to be a sideshow to the problems of Europe that are becoming more and more evident. The euro as it stands at the moment is just a very inappropriate mechanism — I give the euro between one and five years of life,” Mellon said.
The gathering pace of populism across the world was signaled by the U.K.’s referendum, and Donald Trump’s victory in U.S. election this month. Now, more political upsets in Europe, causing some investors to question the future of the euro, could be the result of a growingly speculative Italy’s referendum in December, and the elections in France in 2017. In 2014 Citigroup Inc. said there was a 90 percent chance of Greece leaving the bloc, a call it abandoned this year and therefore predicting the demise of the single currency is hardly a new phenomenon.
After touching $1.0518 last week, the lowest since March 2015, the euro was at $1.0646. Although Mellon is not actively selling the currency because of the chance of a short-term bounce, he expects the currency to fall below parity “sometime over the next year.”
That means Mellon is instead selling Italy’s government bonds with the country’s referendum approaching on Dec. 4. The Italian 10-year yield still remains below its five-year average of 3.24 percent even though it climbed to 2.23 percent on Nov. 14, the highest since July 2015. The bonds have been hurt by a global sell-off in fixed income assets which has seen yields across the world climb from record-low levels in addition to the looming referendum,
“I have been a very big seller of any government bonds this year, anywhere basically, but my favorite are the Italian bonds. Everyone who participates in this stupid bonds market should know that there is a serious duration risk. If you buy something for a very long period with no interest rates, you are going to get your head handed to you at some point,” Mellon said.
Mellon said he “had a good day” after the Brexit vote and his trades have returned almost 25 percent this year. However he declined to provide further details of his performance. The pound could drop to as low as $1.32 following a Brexit, he had said before the EU vote. The currency tumbled to as low as $1.1841 last month, and was at $1.25 on Monday.
According to Mellon, the outlook for sterling remains “pretty good” and “the worries about the sky falling” in aren’t materializing five months after Brexit.
“You have to trade both ways, you can’t just say I am going to be a seller, you also have to become a buyer,” he said.
(Adapted from Bloomberg)