Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
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.


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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

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


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