Buy British Stocks as Brexit Bearishness Overdone, Says Barclays

  • Domestic-focused U.K. shares predicted to outperform peers
  • WH Smith, M&S and Lloyds added to recommended equity list

UBS's Haefele Cuts U.S. Overweight in Shift to Europe

Brexit’s bark may be worse than its bite where British stocks are concerned, according to Barclays Plc.

While domestically-focused U.K. companies have received little favor from investors worried about the fallout from Britain’s exit from the European Union, a nascent outperformance has further to go, Barclays equity strategists led by Dennis Jose wrote in a note. Such shares are pricing in expectations of a recession-style decline in consumer spending even as economic data has been fairly robust, they said, calling such a drop unlikely.

“While Brexit negotiations will undoubtedly cause volatility around economic sentiment, we suspect that markets currently overestimate the impact of a ‘hard’ Brexit,” the strategists wrote on Monday. “The high premium paid by investors for relative safe-haven, high-quality, low-volatility stocks in the U.K. market looks very high compared with historical norms.”

The FTSE 250 Index, with greater exposure to the domestic economy, looks cheap relative to the FTSE 100 Index, according to Barclays. Earnings estimates for the gauge of midcaps have been revised upward since the referendum, even though valuations suggest that many fear a drop in profit, the strategists said.

While gains in the FTSE 250 have lagged those of the FTSE 100 since the June 23 vote, it has recently begun outperforming. The measure of mid-sized firms has jumped 4.8 percent this quarter, about twice as much as its large-cap counterpart, benefiting from a strengthening in the pound and economic data including better-than-forecast retail sales.

Barclays added WH Smith Plc, Marks & Spencer Group Plc and Lloyds Banking Group Plc to its list of recommended European equities, removing Spain’s Almirall SA, France’s Societe Generale SA and Dublin-based Paddy Power Betfair Plc.

Despite fighting talk already breaking out ahead of Brexit negotiations, the EU will favor a deal which resembles the status quo, being loathe to disrupt deeply-embedded supply chains between the two sides, argues Barclays.

If markets don’t entirely share the optimism, global firms at least are taking advantage of the slump in sterling: the number of foreign companies buying up U.K. firms is at a historic high, the bank said.

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