Domestic Revenge Ignites in U.K. Stocks as D-Day Averted

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A can kicked down the road is better than one that explodes in your face. And so, in stock markets at least, people are feeling more relaxed about Brexit than for some time.

With U.K. Prime Minister Theresa May agreeing to possibly postpone the March 29 scheduled departure date if her deal fails and, at the same time, the odds for her success growing, a no-deal Brexit -- markets’ worst-case scenario -- is looking less likely by the day. The relief is palpable in domestic shares, which are rallying and luring back some cash.

“To some extent this is risk deferred, rather than risk reduced,” said Michael Ingram, chief market strategist at WH Ireland in London. “The end game is far from clear, but it is highly likely that March 29 will not be D Day.”

Hats off to the banks who already turned bullish on U.K. domestic shares: Morgan Stanley, JPMorgan, Citigroup and Barclays. Those stocks have jumped versus their more global peers since mid-February as investors re-priced the former’s depressed valuations and the pound rallied.

Meanwhile, good news on Brexit has driven London-listed global companies lower, given their negative correlation with sterling. The FTSE 100 has gained almost 6 percent this year, trailing the FTSE 250’s 11 percent advance.

Emmanuel Cau, a strategist at Barclays, reckons the local trade still has legs, citing elevated short interest in those shares, their low valuations and the potential for economic activity to accelerate as the risk of a chaotic Brexit recedes.

Flows have followed suit. Exchange-traded funds tracking the FTSE 250 have drawn $648 million of inflows so far this year, or 20 percent of their assets, compared with 3 percent for the FTSE 100 and nearly zero for global equities, data compiled by Bloomberg show. Both the two biggest ETFs following the mid-cap benchmark have posted record monthly inflows this year.

Even notoriously low equity positioning in the U.K. has turned less dismal since Parliament’s Jan. 16 rejection of May’s original deal increased hopes of a delay in Brexit, according to Barclays. And short interest has dropped.

Among domestic stocks, all the usual Brexit-sensitive suspects have outperformed this year -- think homebuilders, local banks and retailers. The FTSE 350 Banks Index has been dragged down by declines in the more global HSBC Holdings Plc, but both Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc have gained at least 21 percent in 2019.

But as usual with Brexit, any optimism requires not thinking too far ahead.

“More delay means kicking the can down the road, longer uncertainty, a loss of confidence and a wait-and-see attitude regarding spending and investment decisions,” said Alexis Charveriat, who manages Financiere de la Cite’s Brexit stock fund from Paris. “It opens the door to more political instability.”

To contact the reporter on this story: Justina Lee in London at jlee1489@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Paul Jarvis, John Viljoen

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