Investors warm to UK stocks
Despite a torrid start to 2018 and with Brexit uncertainties looming large, British blue-chip stocks have jumped to record highs thanks to a weak pound, a torrent of mergers and acquisitions, and bouts of political anxiety in the euro zone.
The benchmark FTSE 100 and mid cap 250 index both bounced back in May from lows hit in March, undaunted by two critical Brexit-related events – a vote on the European Union withdrawal bill in parliament next week and a summit of the bloc’s leaders at the end of this month.
Investors are reconsidering the attractions of UK-listed equities relative to those in the euro zone for a combination of reasons. Sterling remains almost 10 percent below where it was before Britons voted to leave the EU in 2016, helping exporters and boosting London-listed firms’ foreign earnings.
On top of that expectations of a long-awaited interest rate increase by the Bank of England are receding and stock valuations are relatively attractive. The disproportionate weighting in FTSE indexes of energy and mining firms has also helped due to buoyant global oil and metals prices.
At the same time, the re-emergence of political uncertainty in Italy and Spain has encouraged investors to reassess their euro zone holdings.
While euro zone stocks ended May with a 2.5 percent loss, the FTSE 100 was the best regional performer, gaining 2.2 percent and returning to positive territory for the year. It was down as much as 10 percent as recently as March.
In some respects, the FTSE is playing catch-up as it underperformed both continental European and U.S. stocks last year. But many investors who have been underweight UK stocks for some time have reconsidered relative positioning, regardless of Brexit and its uncertain consequences.
“The UK was more or less ticking all of the negative boxes which is why so many fund managers were underweight,” Fabrice Theveneau, head of equities at Lyxor Asset Management, said.
“Now it is progressively changing,” he added, saying in a recent interview that his Lyxor Sustainable Equity Europe fund has been reducing its underweight position on the UK market.
May saw the biggest back-to-back monthly increases in allocation to UK equities since before the Brexit vote, despite remaining “the consensus short”, according to Bank of America Merrill Lynch’s latest fund manager survey.
BAML’s cross asset strategists have also rotated out of Europe and into British equities, which they see as a better bet in the later stages of an economic expansion thanks to the London market’s large weighting in energy, materials and defensive stocks such as health and consumer staples firms.
British equities have had a tough time amid uncertainty surrounding the EU divorce talks. So far 2018 has seen the demise of outsourcer Carillion as well as troubles for high street stalwarts Mothercare, Carpetright and Debenhams, to name a few, as inflation puts pressure on consumer spending.
The comeback has been driven, or at least accompanied, by a flurry of M&A activity. This has hit an all-time year-to-date record in 2018 with the total value of UK deals standing at just over $260 billion, according to data from the Thomson Reuters Deals Intelligence team.