(Bloomberg) -- The argument that a weaker pound shields U.K. stocks against Brexit may be getting stretched.
About 37 percent of respondents to a Bank of America Merrill Lynch fund manager survey are underweight U.K. equities, a level of pessimism last seen during the 2008 financial crisis, according to the lender. The finding belies some investors’ hopes that the local market’s global exposure coupled with sterling’s decline can somewhat shelter it from any negative effects of Brexit.
“Some investors are starting to understand that the pound boost for U.K. equities has a limit,” Ken Odeluga, a market analyst at City Index in London, said by phone. “When there are so many opportunities elsewhere, including in continental Europe, it’s difficult to contain the pessimism.”
Even as the FTSE 100 Index -- whose members get about three-quarters of sales overseas -- set a record earlier this month, it was underperforming the MSCI All Country World Index by the most since 1988, according to data compiled by Bloomberg. Damping sentiment is the fragility of Prime Minister Theresa May’s government after two ministers resigned within a week, and the fact that the country is yet to achieve a breakthrough in negotiations with the European Union over its exit from the bloc.
“The continued distractions from Westminster lately are just exacerbating the general concern over Brexit,” Odeluga said.
A higher risk premium weighing on financials and a stronger dollar hurting U.K. materials stocks may eclipse the positive currency effect going forward, according to Gautam Batra, head of investments at Dublin-based Mediolanum Asset Management.
“I have a sense that this time around, it may not help the U.K. market as much as it has done so far this year,” Batra said by phone, referring to weakness of the pound. “It’s a pretty uncertain environment out there for the U.K.”
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