U.K. Stocks Climb as Pound Declines; JPMorgan Turns Overweight

How to Play ‘Brexit’ FX Volatility

U.K. stocks advanced for the first time in three days, helped by mining shares, while the pound tumbled after the mayor of London said he’ll back an exit from the European Union.

Gains in commodities pushed Anglo American Plc, Glencore Plc and BHP Billiton Ltd. up more than 8 percent. Those led the rise in the FTSE 100 Index, which climbed 1.5 percent at the close in London. The gauge is the best performer among major European peers this year, helped by a rebound in miners and weakening of the pound.

The “Brexit” debate is gaining steam after Prime Minister David Cameron last week negotiated new terms for Britain’s membership in the EU. A referendum will be held on June 23, where voters will chose whether to leave or stay in the 28-nation bloc. London Mayor Boris Johnson, one of the U.K.’s best-known and most popular politicians, and Justice Secretary Michael Gove both said they’ll campaign for an exit.

While currency traders are bracing for months of swings in the pound, uncertainty over the vote isn’t having the same impact on equities. FTSE 100 volatility remains lower than a gauge for the euro area. Even mid-cap and smaller companies -- deemed more prone to declines in a “Brexit” scenario -- have dropped less than the Euro Stoxx 50 Index this year. Pictet Asset Management is among those saying the risk of the U.K. leaving the EU is yet to be fully reflected in the stock market.

JPMorgan Chase & Co. says a British exit would be “quite negative” for the market, but it doesn’t expect the nation to leave, according to a note on Monday. The bank turned overweight U.K. equities, reversing a three-year stance of underweight, or owning less than the benchmark. Among its reasons to turn bullish: shares at attractive valuations, lower exposure to commodity producers than before, high dividend yields and more defensive companies, which tend to do well in challenging times.

The bank still recommends hedging for “Brexit” by favoring exporters rather than domestic companies, and the FTSE 100 versus the FTSE 250 Index of smaller stocks. If the country does leave the EU, JPMorgan expects the pound to weaken further and the Bank of England’s actions to cushion some of the negative equity impact.

Among stocks moving on corporate news on Monday, Associated British Foods Plc added 1.2 percent after the retailer raised its annual profit outlook. Home Retail Group Plc jumped 13 percent after Steinhoff International Holdings Ltd. offered 1.4 billion pounds ($2 billion) for the Argos stores owner, topping a previous bid by J Sainsbury Plc. Sainsbury fell 2.3 percent.

HSBC Holdings Plc slid 2.2 percent after posting an unexpected quarterly loss.

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