U.K. Banks, Homebuilders Likely to Rise After Brexit Deal Struck

30 Dec 2020, 05:19 PM IST

(Bloomberg) -- U.K. lenders and homebuilders will be among sectors in focus after the European Union and the U.K. reached a Brexit trade deal.

Futures contracts on the FTSE 100 Index rose 1.3% as of 7:10 a.m. in London.

European Union ambassadors gave the go-ahead to the bloc’s draft free-trade agreement with the U.K., paving the way for the deal to take effect on Jan. 1. The thumbs-up by EU member-country envoys sets the stage for formal approval by the 27-nation bloc’s governments on Tuesday and for a vote by the U.K. House of Commons on Dec. 30.

The pact should give rise to the “unwinding of the uncertainty discount” which has meant U.K. shares have been unloved since the 2016 referendum to leave the EU, Dan Nickols, head of U.K. small and midcap strategy at Jupiter Fund Management, wrote in a year-ahead outlook note prior to the agreement being reached.

The news comes after U.K. shares were hit last week by fresh pandemic restrictions and as several countries closed their borders with Britain after a new strain of the coronavirus was identified in the country. The FTSE 100 index fell 1.7% on Dec. 21 before paring the decline later in the week as hopes of a Brexit trade deal grew.

The sectors most sensitive to the Brexit talks, which are predominately exposed to the U.K. economy, include:

Domestic banks like Natwest Group Plc, Barclays Plc, Lloyds Banking Group Plc and Virgin Money U.K. Plc.
- Other financial services firms like Hargreaves Lansdown Plc and St James’s Place Plc, plus M&G Plc and Aviva Plc could also be active.
Housebuilders including Barratt Developments Plc, Persimmon Plc and Taylor Wimpey Plc.
Commercial-property names like British Land Co. Plc and Land Securities Group Plc.
Retailers including Tesco Plc, J Sainsbury Plc and Wm Morrison Supermarkets Plc.
U.K. government contractors like Capita Plc, Serco Group Plc, Babcock International Group Plc and Mitie Group Plc.
European stocks that have a big exposure to the U.K. include Swedish kitchen maker Nobia AB (41% of revenue), Dutch insurer Aegon NV (29%), retailer Pandora A/S (20%) and Spanish telecoms group Telefonica (15%).
On the flip side, a jump in the pound after the deal may put pressure on the FTSE 100 companies with the biggest overseas earnings, particularly from the U.S.
- That includes construction materials group Ferguson Plc (88% of revenue from the U.S.), credit-data provider Experian Plc (69%), caterer Compass Group Plc (61%) and index heavyweights like spirits giant Diageo Plc (47%) and British American Tobacco Plc (46%)

The deal should provide a boost to U.K. equity returns, David Coombs, fund manager at Rathbone Multi-Asset Portfolios, said prior to the agreement. However, rising unemployment and a weak economic recovery from Covid-19 may “put the dampeners on any Brexit deal-related positivity.”