By Ksenia Galouchko
(Bloomberg) -- Uninvestable. A lose-lose proposition. Avoid for now.
While the jury is still out on whether British Prime Minister Boris Johnson will succeed in Brexit negotiations, strategists are pretty much unanimous in their calls to steer clear of U.K. equities. The likes of JPMorgan Chase & Co., UBS Wealth Management and Sanford C. Bernstein have written off U.K. shares from their investment playbooks until there’s more political clarity.
For the benchmark FTSE 100 Index, whose cyclical shares are already suffering blows from trade war tensions in August, it could be a “lose-lose” situation, as JPMorgan puts it. If Johnson pulls off a miracle and seals a deal before the end of October, a rally in sterling would weigh on the exporter-heavy gauge. And if Britain exits without a deal, a worst-case scenario for most prognosticators, any positive impact of a weaker pound on the gauge’s exporters might quickly give way to a slump fueled by fears of an economic downturn.
Earlier this week, French President Emmanuel Macron gave Johnson little hope he’s prepared to compromise on Brexit and said any changes to the current deal won’t be very significant.
“There are simply better things to go and buy,” said Inigo Fraser Jenkins, head of global quantitative strategy at Bernstein. U.K. equities are “uninvestable,” and not cheap enough to make up for political risks that are hard to forecast, he said.
Among global investors polled by Bank of America Corp. this month, 29% are underweight the U.K., more than in July. The survey also shows just how confused market players are about the timeline of Brexit’s resolution, with 28% of participants saying Britain is likely to leave the European Union on or before Oct. 31, and 21% expecting the nation to exit in November, December or in the first half of next year.
“We believe it is not prudent to base investment decisions on a particular Brexit scenario,” said Willem Sels, a London-based chief market strategist at HSBC Private Bank. “Several potential outcomes exist, and the market’s assessment of the likelihood of these scenarios can continue to shift up and down.”
Amid the widespread political uncertainty and shunning of U.K. stocks, BofA strategist Manish Kabra stands out as a lone bull.
“The base case is the U.K. leaves with a deal,” he said by email. “We like U.K. stocks, mostly as the yield gap between equity and bonds has reached about 100-year wide levels."
Indeed, the declines in the FTSE 100 have lifted its expected dividend yield to 5%, one of the world’s highest. This compares with a 0.6% yield on the generic 10-year U.K. government bond.
Fast-money investors seem to be listening to BofA because the largest exchange-traded fund focused on U.K. stocks, the iShares Core FTSE 100 ETF, is poised for its biggest monthly inflow since January. Still, the benchmark index is heading for its worst monthly decline since 2015.
The FTSE 100 Index and the more domestic-focused FTSE 250 Index are both down since Johnson won the Tory party’s vote to lead the country in late July, with the prime minister repeatedly urging the country to prepare for a no-deal outcome. The pound had its weakest close in decades earlier this month on concern an economic downturn would follow a chaotic exit from the EU.
While the FTSE 100 has benefited from sterling’s weakness for the most part since the 2016 referendum, the inverse relationship could disappear in the case of a disorderly Brexit, with growth concerns outweighing any positive impact from a declining pound, according to JPMorgan’s Mislav Matejka. He has an underweight rating on U.K. stocks.
While London & Capital Asset Management is ready to be opportunistic when there is political clarity, its head of equities Roger Jones said, “Investors should be discouraged from investing in the U.K. before a Brexit outcome as this is effectively wild speculation which will be dominated by political process or lack of it.”
To contact the reporter on this story:
Ksenia Galouchko in London at [email protected]
To contact the editors responsible for this story:
Blaise Robinson at [email protected]
Namitha Jagadeesh, Celeste Perri
