Brexit Tumult Makes FTSE 100 a Winner as Negative Link Deepens

(Bloomberg) --

In a classic illustration of the seemingly perverse relationship between U.K. news and its stock market, several British large-caps notched record highs on Monday as the equity benchmark outshone all of Europe.

The FTSE 100 jumped as much as 1.4%, the most since July and more than double the gain of the Stoxx Europe 600, with companies including AstraZeneca Plc, Diageo Plc and Experian Plc coasting to all-time highs.

The move might seem counter-intuitive, what with data showing an unexpected manufacturing slump last month and headlines dominated by the intensifying political fight over leaving the European Union in less than two months.

But as stock strategists have reiterated for the past three years, the British index benefits indirectly from political chaos, since a weaker currency aids the overseas earnings of the mostly international companies that populate it. That correlation has only deepened lately as the pound grew more volatile.

“Sterling weakness is likely to act as a rebalancing tool over time, both in terms of helping to inflate away some of the debt and in making U.K. goods cheaper for overseas consumers and U.K. companies more attractive to global investors,” Andrea Iannelli, investment director at Fidelity International, wrote in a note. “But if political infighting and the other factors mentioned above pull it lower still, the currency cannot cushion against the fallout forever, and may bring other unwelcome spillover effects.”

Of course, some of Monday’s big U.K. stock winners also had news of their own to celebrate. That market also benefits from more cautious sentiment, thanks to the presence of large defensive sectors such as health care and consumer staples.

But there are also concerns that as the risk of a no-deal Brexit grows, the negative stock-currency correlation might be eroded, as JPMorgan Chase & Co. strategists warned on Monday. The more domestic equities that tend to constitute the FTSE 250 are a lose-lose proposition, since they are expected to suffer from both a no-deal scenario as well as a Labour victory in a general election, they said.

“Recent political developments have increased the risk of fresh elections and a potential crash exit from the EU,” the JPMorgan strategists led by Mislav Matejka wrote in a note to clients. “The usual inverse correlation is at risk of breaking down if political tensions heighten.”

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, Jon Menon, John Viljoen

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