As Brexit Flusters Pound Traders, U.K. Equities Remain Calmby
FTSE 100 volatility index at lowest vs currency counterpart
U.K. shares’ dividend yield greater than global equity index
Less than three weeks before Britain votes on its membership in the European Union, the country’s equity investors are much less worried about the outcome than their colleagues trading currencies.
While polls showing an advantage for the campaign to secede have sent a measure of pound swings to a seven-year high this week, a similar gauge for the stock market has been steadier. The FTSE 100 Volatility Index is now the lowest ever relative to its currency counterpart, according to data going back to 2008.
The benefits of a weaker pound for U.K. exporters and the boost stocks received from improving commodity prices help explain some of the relative calm in the country’s equities, according to Mark Richards, a global strategist at JPMorgan Asset Management. The 4.5 percent dividend yield offered by FTSE 100 companies, about 1.7 times that of global shares, makes them attractive, he said. The shares are the top performers among their major regional peers this year.
“Equities have been reflecting other trends,” Richards said from London. His firm oversees $1.7 trillion. “The U.K. equity market is certainly reflecting EU referendum risks, but it’s nowhere near as extended as currency volatility -- the currency being much more a reflection of domestic conditions compared to the international nature of the equity market.”
The FTSE 100 Index has slipped 0.9 percent this year through yesterday’s close, less than the 7.2 percent slump in the Euro Stoxx 50 Index. The British gauge climbed 0.4 percent at the close in London.
While global factors have a greater impact on its members -- heavyweights such as HSBC Holdings Plc and Royal Dutch Shell Plc get about 65 percent of their sales outside Europe -- even the FTSE 250 Index of companies more dependent on the domestic economy has dropped just 2 percent. The gauge has been even less volatile than the FTSE 100 in the past month.
By comparison, the pound has fallen the most among its major peers in 2016, and a Chicago Board Options Exchange measure tracking its expected swings has jumped 31 percent this week alone.
Equities aren’t entirely immune to the vote scheduled for June 23. The gauge of FTSE 100 volatility has increased 18 percent in the past four days, more than similar indexes tracking estimated stock swings in the U.S. and the euro area. While Tuesday’s polls triggered this week’s moves, other surveys have suggested the “Leave” and “Stay” campaigns are neck-and-neck.
“The equity market is not pricing a very high probability for a Brexit scenario right now,” said Michael Kapler, an equities manager at Mittelbrandenburgische Sparkasse in Potsdam, Germany. “The closer we come to June 23, even if polls are equal on both sides, the more volatility will rise. And if it really comes to a Brexit, then volatility will rise a lot.”
German Chancellor Angela Merkel this week cited trade and the single market as key reasons for the U.K. to stay in the EU, warning that it would lose influence if it leaves. Bank of England Mark Carney said last month a vote to exit could cause a recession in the country. Fund managers’ allocation to British equities fell to its lowest level since 2008, according to Bank of America Corp. survey published last month.
Much of the Brexit concern is probably priced in already, said Guillermo Hernandez Sampere, head of trading at MPPM EK in Eppstein, Germany.
“British companies will not cease to exist even if the British vote to leave the EU,” said Hernandez Sampere, who helps manage 220 million euros ($245 million). “The currency is different -- it’s the perfect playground for fast money players. If you ask people what’s going to happen after a Brexit, the only honest answer that everyone may give is ‘We don’t know.’”
Michael Bloomberg, the founder and majority owner of Bloomberg LP, the parent company of Bloomberg News, has publicly supported the campaign to keep the U.K. in the EU.