Brexit Proves Bane for This U.K. Stock Index as Peers Rally

  • FTSE Local U.K. index underperforms FTSE 100 by most on record
  • Stocks dependent on domestic market see fallout from Brexit

In a year when most British stock benchmarks have dodged Brexit’s punch, one U.K. gauge is getting bruised.

While a slumping pound boosted exporters, sending the FTSE 100 Index and gauges of mid- and small-cap shares to new highs this month, the FTSE Local United Kingdom Index is poised for its biggest annual drop since the global financial crisis. The measure of companies that get most of their sales from the country fell to a two-month low this week and remains below its level on the day of the U.K. referendum.

As worries mount that the U.K. government’s approach to exiting the European Union will mean forgoing membership of the single market, firms reliant on Britain have suffered the heaviest blows. Members of the local index including homebuilder Taylor Wimpey Plc and lender Lloyds Banking Group Plc have lost about a quarter of their market value since the referendum, in sharp contrast to gains of 28 percent or more in FTSE 100 exporters such as AstraZeneca Plc and Burberry Group Plc.

“This is a country that’s a quasi emerging market now, if you look at its massive political risk, and the domestically focused corporates stand to lose the most,” said Nicholas Spiro, a partner at London-based Lauressa Advisory Ltd., which advises asset managers. “The extremely buoyant conditions in the equity market right now are somewhat deceptive.”

Mounting worries have spurred fresh declines in the pound and the local equity gauge in October, after Prime Minister Theresa May said she’ll trigger the exit process by March 2017. A flash crash in sterling on Friday prompted strategists to revise down their longer-term forecasts. The currency rebounded on Wednesday, and the benchmark FTSE 100 was little changed, after May accepted that Parliament should be allowed to vote on her Brexit plan.

The pound’s role as a barometer for Britain’s economic outlook since the referendum has divided stock performance. Members of the FTSE 100 and FTSE 250 get about three-quarters and half their revenue from countries outside the U.K., respectively, according to estimates by JPMorgan Chase & Co. and UBS Group AG. The lesser-known local gauge, part of a FTSE Russell index series reviewed annually, includes firms reliant on the domestic market for 70 percent or more of sales.

While some British data since the June referendum have exceeded expectations, investors should also look at local U.K. companies for clues on sentiment about the economy, according to Guy Foster, head of research at Brewin Dolphin, which manages 33.5 billion pounds ($41 billion). By that measure, the FTSE Local U.K. index is underperforming the FTSE 100 by the most since data going back to 2006.

“Investors are clearly concerned about the U.K. economy,” Foster said. “That’s why you are seeing the huge underperformance of local companies.”

EasyJet Plc last week reported an annual profit drop for the first time since 2009, citing the pound slump as one of the main reasons, while apparel retailer Next Plc warned last month 2017 sales will be hurt by Brexit-induced price increases. The two members of the local gauge have each declined at least 35 percent this year.

“It’s the local companies where you’ll see the first hints of Brexit hitting,” said Michael Woischneck, who manages about $180 million as a senior equities manager at Lampe Asset Management in Dusseldorf, Germany. “Global companies have global capital markets and banks to get their money from, but U.K. local companies don’t. The index will suffer even more.”

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