Here’s the State of U.K. Stocks as Boris Johnson Takes Office
(Bloomberg) -- The U.K. stock market has been a precarious place for investors since the referendum on leaving the European Union in mid-2016. Whether or not it gets any better this year largely depends on if the country’s new prime minister delivers on his campaign promises.
As Boris Johnson takes office Wednesday, domestic-focused stocks remain out of favor, valuations are broadly depleted and the country languishes as the most unpopular among surveyed fund managers.
Investors now have to weigh the various scenarios -- a no-deal Brexit, an early election, yet another extension or an agreed upon deal and orderly transition -- under a Johnson administration. A hardline Brexiteer, Johnson campaigned on pledges that the U.K. will leave the EU by the Oct. 31 deadline.
“The market will soon focus not just on the Brexit endgame, but also on the stakes around the general election,” Alain Bokobza, head of global asset allocation at Societe Generale SA, said in an interview. “We will have to watch the structural evolution of U.K. politics and the scenarios are probably much more open than the market currently thinks.”
With the Queen about to confirm the start of Johnson’s premiership, here’s how things stand right now:
International Versus Domestic
The politics have been turbulent, but one relationship has been dependable since the 2016 vote: whichever way the pound goes, the relative performance of domestic shares versus U.K.-listed global names follows. By that logic, it’s easy to understand why the mid-cap FTSE 250 Index has lagged behind the large-cap FTSE 100 by about 5 percentage points since the referendum. The currency’s decline this month suggests pain for British locally focused stocks likely isn’t over yet.
Exporters may well cheer the pound’s depreciation, but those making money closer to home haven’t been as fortunate. British homebuilder shares have been bruised by the divorce from the EU, as economic uncertainty grips the property market, while retailers suffered as Britons cut back on shopping. And domestic-focused banks like the Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc have been as good a gauge of Brexit troubles as any.
In local-currency terms, U.K. shares have followed global markets in rallying over the past three years. But valuations paint a gloomier picture: The FTSE 350’s one-year forward price-earnings ratio has fallen 17% compared with the European benchmark from 2016’s peak. The relative multiple is at the lowest in 13 years.
U.K. stocks may be cheap, but for global investors trying to assess the potential for a chaotic no-deal Brexit, it’s hard to judge whether the appearance of value isn’t, in fact, a value trap. In Bank of America Corp.’s survey of global fund managers, a net 23% were underweight the country in July, making it the most disliked region for 41 months straight.
Brexit also looks to have reduced London’s attractiveness for new listings. In the three years leading up to the June 2016 vote, there were 359 initial public offerings in the U.K., raising $70.2 billion. In the three years since, those tallies have dropped to 283 and $55.1 billion. Exchanges outside London have gained meanwhile, hosting 13% more IPOs since the referendum than in the previous three years.
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