FTSE 100 companies will continue to be the main winner from the government’s Brexit negotiations with the EU, according to advisers.
But nearly as many thought the pound might be a surprise beneficiary as the talks continued.
According to the latest FTAdviser Advantage poll, 37 per cent of advisers believed FTSE 100 stocks would be a direct winner as a result of Brexit discussions, while 34 per cent thought sterling might regain strength, even though its value has steadily declined since the referendum results last year.
The currency’s fall has been a boon for FTSE 100 companies, which mainly trade overseas and whose revenues have benefited from the devaluation of the pound.
In fact, the FTSE 100 has climbed around 18 per cent since the 23 June 2016.
This has meant many mid-cap companies have been negatively affected by the decline in the pound as they generated revenues domestically.
Laith Khalaf, senior analyst at Hargreaves Lansdown, observed: “Overall the UK stockmarket has performed very strongly since the EU referendum, though it’s actually a laggard compared to the returns UK investors have received from overseas markets.
“That’s because weaker sterling has been one of the key drivers of the Footsie [FTSE 100], and that currency boost is even more powerful for overseas markets, when returns are converted back into pounds and pence.”
He pointed out: “However the FTSE Small Cap index has surprisingly returned more than the FTSE 100.”
While this may initially seem like a sign of the strength of the domestic economy, on closer inspection Mr Khalaf noted the index was heavily populated with investment trusts which invested in overseas equities.
“Stripping out the performance of these trusts leaves the small cap index lagging slightly behind the FTSE 100 since Brexit, still a very strong showing, but worthy of only second place on the podium.”
Not everyone is so certain the UK’s companies will benefit from the Brexit talks already underway, with Smith & Williamson having reduced its model portfolio service’s exposure to UK equities.
It cited market valuations “riding high” and “continuing uncertainty over the UK’s Brexit negotiations” for its decision.
So what are the prospects for the pound’s recovery as the UK negotiates its way out of the union?
If the government’s Brexit secretary David Davis negotiates a ‘soft’ Brexit, the likelihood of which remains unknown, then the pound may recover.
But if, as prime minister Theresa May has indicated, he went for a ‘hard’ exit from the EU, which might mean leaving the single market for example, then the pound could fall further.
Only 8 per cent of advisers thought UK corporate bonds would be set to win from Brexit.
Alix Stewart, fixed income fund manager at Schroders, said: “Corporate bond spreads – the difference in yields between corporate bonds and government bonds - have tightened. The BoE’s bond purchase programme brought about a rush to borrow at low rates by companies.
“However, in a world of abundant central bank liquidity, UK corporate bond yields have not tightened much more than they have in other global markets.”
eleanor.duncan@ft.com
