Timid recovery in UK stocks faces new hurdle: Polls

Bloomberg

Just when UK equities were starting to look good on receding Brexit uncertainty, a general election comes along that could make or break the market.
After being long-time market pariahs, British stocks have been slowly gaining favour from both the buy and sell sides in recent weeks. An exchange-traded fund tracking UK mid-caps enjoyed record inflows, UBS Global Wealth Management closed its underweight position on the country’s equities and Bank of America Merrill Lynch strategists predicted further upside in the event of a Brexit deal.
But now, with the domestically-sensitive FTSE 250 Index near a one-year high, the country is heading for a general election that is set to become a proxy referendum on Brexit. Key for markets will be any outcome that reduces the prolonged uncertainty that has weighed on equities.
However, it’s unclear whether any single political party will gain a clear majority to govern.
“While an election is a necessary next step in order to try and break the current parliament logjam, there is no guarantee that the parliamentary arithmetic will be improved,” said David Holohan, head of equity strategy at Mediolanum.
“Given this scenario, UK asset performance is likely going to continue to be dominated by the strength or weakness of sterling.”
The fortunes of British equities have waxed and waned with the pound, with sterling rising in October on optimism that the UK will avoid exiting the European Union without a deal. The FTSE Local UK Index is heading for a gain of 3.6% in October, versus a drop of 1.4% for the export-heavy FTSE 100 Index of the largest stocks, which tends to have an inverse relationship with the currency.
Longer term, investors have been avoiding UK equities for years and it remained the least popular stock market in the world for fund managers in the latest Bank of America survey.
But recent inflows into the Vanguard FTSE 250 UCITS ETF and the iShares Core FTSE 100 UCITS ETF suggest that any optimism on removing the Brexit overhang could spur those waiting on the sidelines to boost their exposure to the country’s equities.