StockBeat: There's More to U.K. Stocks Than Brexit

June 18
17:04 2019

By Geoffrey Smith — The Brexit endgame may be casting ever-longer shadows over U.K. assets, but it’s not cloaking them entirely in darkness

With the U.K. seemingly on the verge of choosing a new Prime Minister committed to leaving the EU without transitional arrangements to ensure smooth trade on October 31, sterling is wilting. However, U.K. stocks – already ‘under-owned’ by international institutional investors, seem to be less affected.

The pound hit a new low against the euro for the year of 1.1149 earlier Tuesday, an achievement made all the more remarkable by growing speculation that the European Central Bank will take its interest rates still deeper into negative territory before the summer is out. By contrast, not even hawkish talk by policy-makers of a labor market running hot seems to be able to give credibility to the Bank of England’s tightening bias.

The U.K. stock market is the second-worst performing of all major European bourses this year, lagging only Spain’s IBEX. The FTSE All-Share Index is up only 9.3%, while the Euro Stoxx 50, which tracks only Eurozone stocks, is up 12.8% (both the U.K. and European markets are drifting Tuesday, ahead of the Federal Reserve’s policy meeting that starts later in the day).

And yet, the stand-out performances among individual stocks appear to have little to do with the drawn-out European drama. Two of the best three performers in the index are clothes retailer Next (LON:NXT) – a fairly pure play on U.K. consumer spending that has shown clear signs of weakness as Brexit-related uncertainties slowed the economy – and London Stock Exchange Group (LON:LSE), which may well lose large chunks of some of its core businesses in the event of a “Hard” Brexit. Of those, Next’s biggest challenge has been the transition to an omnichannel retailer, while LSE has profited from escaping a merger with Germany’s Deutsche Boerse (DE:DB1Gn) that would have brought endless political and regulatory distractions.

At the other end of the spectrum, utility Centrica (LON:CNA) can hardly blame its 35% drop this year on Brexit, and sub-prime lender Provident Financial (LON:PFG) is down 25% largely to a failed merger deal and some rigorous attention from the regulator.

Nor is Brexit the only risk out there: utilities are spooked by the prospect of a hard-left Labor government coming to power if Conservative support blows up at the next election, while the natural resource groups that have sustained the FTSE 100 for most of the last three years are now under pressure from the U.S.-China trade war, which is hammering commodity markets.

It’s also possible to argue that the problems of tour operator Tui (LON:TUIT) and International Airlines Group (LON:ICAG) – two of this year’s other big losers – are due to bigger problems such as excess capacity (although you can argue that Brexit uncertainties have contributed to weak European demand for short-haul flights in particular).

The moral seems to be that even if the B-word requires a higher risk premium for the market in general, there is still plenty of scope for differentiated performance within the world’s least loved asset class.

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