- Equities have fallen only 3.3% this year, outperforming Europe
- Polls providing so far little insight on referendum outcome
In London’s beaten-down stock market, rebounding commodities are proving a bigger influence on share prices than any concern about the U.K. and the European Union.
Unlike in currencies, where the pound tumbled on Monday, equities extended their best weekly advance since October, even after London’s mayor said he’d campaign for Britain to leave the EU in a June referendum. So far this year, British stocks have performed better than any other market in western Europe, and a gauge tracking FTSE 100 Index volatility fell to its lowest level since December relative to the broader region.
After trailing peers for four years, U.K. shares are now benefiting from a rebound in miners and weaker sterling, while the rest of the region is suffering from skepticism that the European Central Bank’s stimulus will revive the economy. JPMorgan Chase & Co. just turned bullish on British equities after being underweight for three years, citing low valuations and a preponderance of companies that offer shelter in times of global-market turmoil.
“There are a number of tailwinds for the FTSE 100,” said Lorne Baring, a fund manager who helps oversee $500 million at B Capital in Geneva. He expects the nation will remain in the EU. “The reaction of the pound will actually be favorable. A weaker sterling will improve exports of both goods and services. We also have the oil price rising.”
Britain’s benchmark measure fell 3.3 percent this year through Monday, about a third the losses in the Euro Stoxx 50 Index. Gauges of small- and mid-cap shares have also dropped less than the regional measure. Rolls-Royce Holdings Plc -- one of the stocks that JPMorgan deems most at risk in a “Brexit” scenario -- rallied 15 percent in 2016. Anglo American Plc and Randgold Resources Ltd. surged more than 53 percent. Exporters such as British American Tobacco Plc and Reckitt Benckiser Group Plc are also up.
The FTSE 100 slipped 0.9 percent at 8:17 a.m. in London.
A measure tracking expectations for swings in Britain’s stocks fell 8.7 percent on Monday, taking its decline since a Feb. 11 high to 27 percent. That compares with a slide of 22 percent for the VStoxx Index of euro-area stock volatility.
One caveat to why equities have remained relatively calm: it may still be too early for investors to start positioning. Pictet Asset Management has warned that U.K. stocks are not reflecting the true danger of a potential exit from the EU, while Axa Investment Managers and Morgan Stanley are among firms saying the shares may suffer as the June 23 vote approaches.
With a valuation of 1.7 times book value, FTSE 100 companies are cheaper than those in the MSCI All-Country World Index, JPMorgan said in a note on Monday. The U.K. gauge’s dividend yield of 4.6 percent is almost twice as high as that of the global gauge and compares with about 1.4 percent for 10-year gilts.
JPMorgan doesn’t expect the U.K. to leave the EU, but says that even if it does, the initial negative impact on the market would be cushioned by a weaker pound and Bank of England action. So far, an index of companies it says areat risk, which comprises mostly financial companies, has lost 13 percent this year.
Barclays Plc’s William Hobbshas a different stance and keeps an underweight on U.K. stocks because of the still-high exposure that the FTSE 100 has to commodities. Miners and energy producers account for almost a fifth of the index.
“It’s a defensive index and we want more pro-cyclical exposure for our clients because we don’t think the world is coming to an end just yet,” said Hobbs, head of investment strategy at Barclays’s wealth-management unit in London. “The fundamentals of the large-cap index would be more driven by what happens in the commodity sector than by the referendum, whether we choose to stay or go.”
Recent polls have offered little insight on the potential outcome of the referendum. The latest, from ICM, showed 42 percent of respondents in favor of staying in the bloc, with 40 percent opposed and 17 percent undecided. The online survey of 2,021 voters was conducted almost entirely before London Mayor Boris Johnson’s announcement. A Survation poll carried out Saturday showed a 15 percentage-point lead for staying in. That’s in line with other recent phone surveys, which have consistently shown big leads for the status quo, while more frequent online polling has been inconclusive.
“Whether the U.K. leaves the EU or not does not affect our view on U.K. stocks,” said Pierre Mouton, who manages about $9 billion at Notz, Stucki & Cie. He expects the nation will remain in the 28-nation bloc “There is a chance the pound would weaken should they decide to leave the EU. It improves the competitive landscape for the U.K. economy.”