UK equity investors have been shifting out of blue-chip exporters into FTSE 250 companies as the pound heads towards $1.35 on optimism that the UK is close to reaching a deal over its exit from the EU.
The pound soared in early morning trading yesterday on news the UK had agreed to pay the EU €45bn and €55bn towards the Brexit bill, paving the way for trade talks to proceed next month.
Blue-chip exporters have felt little love as a result, says Interactive Investor head of equity strategy Lee Wild, with attention shifting to the FTSE 250 and to stocks which rely more on the domestic economy than overseas.
“Retailers like Next and M&S will benefit from lower import costs, and a strong economy is good both for housebuilders and the banking sector whose margins improve as borrowing costs rise,” Wild says. “Solid companies like these are currently among the cheapest and highest yielding stocks around.”
If expectations of an agreement become reality the pound is likely to further appreciate and continue the rotation out of blue chips and into the mid-cap index, says Wild.
But he warns the sterling boost could be temporary.
“Agreeing a divorce bill with the EU is one thing, finding a solution to the Irish border problem is quite another.”
He adds that as negotiations continue businesses still have little choice but to make contingency plans for a hard Brexit, which means less investment until there is greater clarity on the likely outcome.
The difficult political environment for UK equity investors was recently highlighted by Franklin Templeton manager Colin Morton.
He says the Conservative government could continue to fumble through Brexit or it could collapse, leading to the election of Jeremy Corbyn, with each outcome having very divergent impacts on sterling and the FTSE.