Article / 01 July 2016 at 12:38 GMT

A post-Brexit disconnection notice for UK stocks

Head of Equity Strategy / Saxo Bank
  • Post-Brexit recovery rally drives many UK stocks higher
  • We are seeing potential overbought levels in UK exporters 
  • Sterling, UK exporters likely to come down from recent highs

City of London
The UK's benchmark equities index has soared after an initial post-Brexit 
plunge, but the rally is not likely to last. Photo: iStock 

By Peter Garnry

The FTSE 100 (UK100.I) is trading at the highest levels seen since August 2015 and is now 3.3% higher than the closing price prior to last Friday's Brexit vote. 

The rally has been driven by high index weight stocks such as AstraZeneca (14.4%), British American Tobacco (14.4%), Diageo (14.3%), Unilever (13.6%), GlaxoSmithKline (11.3%) and BP (14.6%). 

As expected, and something we highlighted in our pre-Brexit analyses, pharmaceuticals and consumer stocks with high non-UK shares of total revenue are outperforming all other segments. The moves, however, seem extreme now and we feel that many of these names are potential short candidates (either outright or hedged).
The two best performers in the FTSE 100 are Fresnillo, up 36.4%, and Randgold Resources, which is up 34.2% as gold is being rebalanced to higher portfolio weights across many institutional investors. 

However, the rally seems a bit out of touch with the underlying fundamentals. The regression plot below shows the last two years of log weekly prices (Randgold versus gold spot) and it’s very clear that the current price in Randgold is significantly above normal; thus Randgold seems like a potential short candidate.


Create your own charts with SaxoTraderGO click here to learn more

Source: Saxo Bank 

The GBP trade-weighted spot index is down 9.2% since Brexit so the positive reaction in many of the UK export stocks makes sense. 

Investors have to remember, however, that currency shocks are often temporary and do not have lasting impacts on future cash flows. In most cases among major currency pairs, large shocks quickly find a new equilibrium or revert back to a mean level.

Deutsche Bank GBP trade-weighted index spot:
Deutsche Bank
Source: Saxo Bank 

From our perspective, the most likely scenario that a lot of flow takes place with foreign investors scaling back their GBP exposure simply driven by risk management rules. 

As a result, the GBP moves are driven a lot by liquidity effects and those are likely softened by Bank of England actions in the currency market. As the flow slows down, we would expect a reversal in the GBP and export shares coming down again. 

— Edited by Michael McKenna

Peter Garnry is head of equity strategy at Saxo Bank

01 July
Denisv Denisv
Hello Peter! What you think about short Fresnillo, now it has P/E >200 it looks not very good


The Saxo Bank Group entities each provide execution-only service and access to permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on or as a result of the use of the Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail