U.K. Stock Investors Wary of Brexit Risks Stay on the Sidelines

  • Average trading of FTSE 100 Index shares at lowest of year
  • Hedging costs are near their highest levels since 2011

As the debate heats up on whether Britain will remain in the European Union, traders are stepping up hedging and pulling out of the stock market.

With company executives and the Bank of England warning of the fallout from a potential exit as the June 23 vote approaches, the cost of protecting against declines in the FTSE 100 Index has jumped to a four-year high. At the same time, the volume of shares changing hands has slumped 21 percent since February to its lowest level of the year, dropping more than for Stoxx Europe 600 Index members.

The trading reflects the lack of confidence in the rally that has made U.K. equities the best bet among major western-European markets this year. BOE Governor Mark Carney has said a so-called Brexit threatens the U.K.’s financial stability and could lead to slower economic growth, while companies from Barclays Plc to Reckitt Benckiser Group Plc have warned it could hurt their businesses. 

“Traders are preferring to remain cautious as there is so much risk,” said Benno Galliker, a trader at Luzerner Kantonalbank AG in Lucerne, Switzerland. “Everybody is wondering: what now? With the Brexit vote in two months, you’d rather play it safe.”

Due in part to the potential for secession, about 20 percent of global fund managers say they’re underweight U.K. stocks, making it the least favored region globally, according to a Bank of America Corp. survey this month. While a rebound in miners and a weakening pound have helped the FTSE 100 erase annual losses, the cost of bearish three-month options on the gauge has climbed more than 30 percent since a low in December, relative to bullish contracts.

The FTSE 100 slipped 0.3 percent at 8:30 a.m. in London.

Since the market rout in February, the volume of shares traded on the gauge slid to about 746 million on average each day in April. That compares with a 14 percent decline to 3.2 billion for those on the Stoxx 600, while trading of MSCI All-Country World Index members increased 9 percent in the period.

In addition to Barclays and Reckitt Benckiser, companies such as Diageo Plc have been vocal over the impact of a potential British exit from the EU, while financial firms HSBC Holdings Plc and Bats Global Markets Inc. have said they’d move at least some operations outside of the U.K. in that event. A report this week will probably show the nation’s growth has started to lose momentum, with economists forecasting an expansion of 0.4 percent, matching the weakest reading since 2012.

It’s not just Brexit fears that are hampering trading, said Alan Roldan, a director at WallachBeth Capital LLC. Concerns over China’s slowdown, oil’s price and a loss of confidence in the efficiency of central-bank stimulus are also keeping investors away.

“There have been a lot of outside, policy-related factors affecting markets lately,” said Roldan from New York. They “have caused reluctance to trade before news events due to the small risk-reward of trying to predict the outcomes,” he said.

The FTSE 100 almost erased all its gains for the year, after a three-day drop through Monday, its longest losing streak since February. The culprits? Miners. A gauge tracking them dropped to a two-week low on Tuesday.

“Investors seem to be either a bit wounded, or are a bit gun shy for the moment,” said Bradley Miln, an equity sales trader at Makor Securities London. “Once the uncertainty of Brexit is out of the way and we have a bit more of a steer from central banks, we should see an increase in volumes.”

Before it's here, it's on the Bloomberg Terminal.