Photographer: Chris Ratcliffe/Bloomberg

Stock Traders Forgo Pound Obsession as FTSE 100 Link Breaks

  • Economists estimate U.K. growth will beat euro area this year
  • FTSE 100’s valuation now about the same as that of FTSE 250

The pound is loosening its grip on the FTSE 100 Index.

After the sinking currency helped lift shares of Britain’s multinational companies in the immediate aftermath of the U.K. secession vote, the inverse correlation between the two is finally breaking down. Now it’s optimism that the nation’s economy is weathering Brexit that’s sending the FTSE 100 up for a fourth month.

The stocks gauge and the pound have moved in the same direction for five straight sessions, the longest streak since Britons voted to leave the European Union. Weaker sterling translated into improved profit estimates in the days following the referendum, and now economic data are beating forecasts. The Bank of England even increased its growth forecast for this quarter, noting that recent reports have been stronger than anticipated.

“The earnings benefit from the big drop in the currency is old news,” said Alan Higgins, chief investment officer at Coutts & Co. in London. His firm oversees 14.6 billion pounds ($19 billion). “These micro moves are not really going to change much for the FTSE 100. Instead, there’s a growing interest in how the economy seems to be holding up, which should impact the pound and British firms in the same way.”

Recent reports showed retail sales fell less than economists had predicted in August, while gauges of manufacturing and services activities rebounded. Forecasts for U.K. growth have improved in the past month for both the third and final quarters of this year, with economists projecting gross domestic product will rise 1.6 percent in 2016, more than the euro area. Traders aren’t pricing in another rate cut from the BOE until at least the end of 2017.

Both the FTSE 100 and the pound were little changed at 8:17 a.m. in London.

But shaking off the pound relationship means that the FTSE 100 has lost its edge over smaller and more domestically focused British companies. While the megacap gauge culminated at a 14-month high in mid-August, the FTSE 250 Index and the FTSE Small Cap excluding Investment Trusts Index continued to rise, reaching their peaks earlier this month.

That’s made the FTSE 100 more attractive to some. At 15.6 times estimated profit, its valuation is about the same as that of the measure of middle-sized companies. Just in July, the premium investors were willing to pay for megacaps was the highest in a decade. Chris Beauchamp, a market analyst at IG in London, says that’s a buying opportunity.

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“You can take a punt on economic growth through the FTSE 100, and it’s a relatively cheap way to do it,” Beauchamp said by phone. “People are focusing on that now, rather than whether tiny moves for the pound will affect the bottom line.”

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