‘No Reason to Sell U.K. Assets’: Market Strategists on Brexit

(Bloomberg) -- This weekend’s developments in the U.K.’s path to exit the European Union have left equity and sterling investors trying to guess what will happen next, though some are optimistic that Boris Johnson may be able to win parliamentary backing for his deal this week.

Both the pound and the FTSE 250 -- which have gained in recent days amid hopes of a deal -- reversed early losses on Monday. The FTSE 100 was trading little changed, though Brexit-sensitive stocks including U.K. banks and housebuilders were among the biggest gainers. The weekend’s delay of a vote on Johnson’s deal “is no reason to sell U.K. assets or sterling,” said Kallum Pickering, senior economist at Berenberg.

With another dramatic few days in U.K. politics ahead, here’s what market participants are saying about the latest developments.

Chris Bailey, Raymond James

• Expect the deal “ultimately passes in some shape or form,” which is why U.K. assets aren’t retracing last week’s gains.
• U.K. assets are cheap -- they just need to get over the Brexit hurdle. Yes, there is uncertainty but getting over it helps provides a floor and with U.K. assets there is a low barrier given how underowned they are.”

Graham Secker, Morgan Stanley

• “U.K. equity market becoming investable again. A reduction in Brexit uncertainty should lead to renewed interest (and re-rating) in U.K. equities, which are arguably one of the most unloved and undervalued areas of global stock markets.”

Jari Stehn, Goldman Sachs

• “While developments over the weekend certainly puncture some of the Prime Minister’s political momentum, we think they also reveal that the PM can command a stable cross-party majority in favor of his Brexit deal. In our view, the decisive test of that deal has been postponed by a few days; the deal has not been defeated.”
• “As for our baseline path, we maintain the view that the U.K. will leave the EU on 31 October. On terminal outcomes, we lower our “no deal” probability from 10% to 5%, we leave our “no Brexit” probability unchanged at 25%, and we revise up the probability we attach to a ratified deal from 65% to 70%.”

Paul Hollingsworth, BNP Paribas

• “The U.K. leaving the EU with a deal remains the most likely ultimate outcome, in our view, although not necessarily by 31 October. As the prime minister, Boris Johnson, has requested an extension of Article 50, we see the probability of a ‘crash out’ on 31 October as very low. Nonetheless, uncertainty persists.”
• “Although Mr. Johnson probably has the numbers for his Brexit deal now, we see several potential hurdles over the coming weeks. For markets, this means headline risk will remain high in the near term.”

Kallum Pickering, Berenberg

• “The outcome is no reason to sell U.K. assets or sterling, in our view. Johnson still plans to pass the necessary U.K. domestic legislation to implement the Brexit deal and to hold the decisive vote on his Brexit deal in parliament this week, with a first vote as early as today.”

Ipek Ozkardeskaya, London Capital Group

• “So far, pound traders are content that a disorderly Brexit will likely be avoided in two weeks. Yet an early general election and maybe another Brexit referendum are on the U.K.’s political agenda for the coming months. Therefore, cable could give back its recent gains along with the fading hopes of an imminent Brexit agreement.”
• “Ongoing Brexit uncertainties could inject some volatility to the British stock markets approaching the October 31st deadline as well, where small, mid-cap stocks would be more exposed than the blue-chip stocks which benefit from dollar denominated revenues.”

--With assistance from Lisa Pham and James Cone.

To contact the reporters on this story: Sam Unsted in London at sunsted@bloomberg.net;Ksenia Galouchko in London at kgalouchko1@bloomberg.net;Joe Easton in London at jeaston7@bloomberg.net

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, Blaise Robinson, Beth Mellor

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