U.K. Stocks Fall While the Pound Climbs

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The pound is jubilant today as the chances of a no-deal Brexit are dimming, but U.K. stocks remain hard to please.

The FTSE 100 Index retreated as much as 1.2 percent, underperforming the Stoxx Europe 600 Index gauge, as sterling climbed 0.4 percent. The reason? The U.K. equity benchmark remains heavily skewed toward export-oriented shares, so the gains in sterling signal reduced local-currency revenue.

U.K. Stocks Fall While the Pound Climbs

It’s already been an exciting week in U.K. politics as Prime Minister Theresa May is said to be considering a plan to delay Brexit and stop Britain from leaving the European Union without a deal next month, whereas opposition Labour leader Jeremy Corbyn has decided to back a second referendum. The chances of a no-deal departure have diminished significantly, which is supportive of the pound and U.K. domestic stocks, according to AllianceBernstein, Brooks Macdonald Asset Management Ltd. and Financiere de la Cite.

“Yesterday’s developments reduce the negative tail risk for sterling whilst possibly boosting the chances of a remain outcome,” said Edward Park, deputy chief investment officer at Brooks Macdonald in London. “The multinational heavy FTSE 100 has fallen today, reflecting the translational losses in sterling terms of their foreign earnings, whilst the more domestic focused FTSE 250 has outperformed.”

Mid-caps in the FTSE 250 Index were doing much better than their larger counterparts, with the gauge trading little changed. The JPMorgan Index of U.K. domestic stocks climbed 0.3 percent. Britain’s mid-caps are more domestically focused and benefit from optimism around the fading chances of a no-deal Brexit, according to investment bank Raymond James.

“There are many hurdles still to jump over on Brexit and some hope has already been factored in, judging by movements in both the pound and U.K. equities year-to-date,” said Chris Bailey, a European strategist at Raymond James. “Anything that reduces uncertainty further will be taken well and I judge there is still upside in both the pound and more domestic focused U.K. shares.”

Barclays Plc strategists led by Emmanuel Cau said in a note Tuesday that the risk-reward ratio for British domestic companies remains skewed to the upside and any additional strength in the pound would boost this trade, while hurting the relative performance of FTSE 100 versus the continent. Barclays remains underweight U.K. equities within its pan-European portfolio.

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