Thursday, May 6, 2021

Hedge funds look past Brexit risks by betting on battered UK stocks

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Hedge funds are betting UK stocks are expected to rebound, despite concerns over the possibility of closing a trade deal with the EU before the year-end deadline.

After a largely miserable performance during the coronavirus crisis, some fund managers believe UK stocks offer one of the last places to find bargains in a world where ultra-loose monetary policy has pushed asset prices up. This optimism comes despite increasing uncertainty on whether the UK and EU will reach a deal before the Brexit transition period expires at the end of this month.

“We find stocks very cheap in the UK,” Paul Marshall, co-founder of hedge fund firm Marshall Wace, told the Financial Times. Sir Paul, whose company is one of the world’s largest hedge fund groups with $ 50 billion in assets – and who has been vocal in recent years on the opportunities presented by Brexit – predicted “a great mergers and acquisitions feeding frenzy” next year encouraged by these low valuations.

While “some of the value has disappeared” as battered stocks such as telecoms group BT and leisure firm Whitbread rallied recently, “there are still many pockets” of value in the Kingdom. -United, he added. In October, Marshall Wace revealed an important position in British Airways owner IAG, which has also staged a partial takeover in recent weeks. A big bet against UK bank Lloyds has since been cut below the 0.5 percent disclosure level.

Other companies are taking equally optimistic positions. According to a Morgan Stanley note sent to clients this month, the ratio of hedge funds bets on rising UK stocks to those on falling UK stocks is around its highest level in five years.

London’s FTSE 100 joined a global market rally last month, jumping more than 12% in its biggest rise since 1989. Those gains have continued throughout this month, with the index rising another 4 percent despite a wobble Friday sparked by growing angst over EU-UK trade talks.

One of the funds already benefiting from this increase in UK stocks is London-based Lansdowne Partners. The company is a longtime fan of the UK, and tell investors in January that his “belief in the British desirability” was “very high”.

It has suffered heavy losses in its main Long Only Developed Markets fund this year, in part due to positions in the UK, but has recovered nearly 21% last month, according to figures sent to investors and seen by the FT , leaving it down 6 percent for the year. Lansdowne declined to comment.

Despite their strength in November, UK stocks have been a weak investment relative to the US this year. The FTSE 100 is down 12% in dollars in 2020, behind the US S&P 500 index by around 25 percentage points and the Nasdaq 100 by more than 50 percentage points, as investors chose US technology groups like the one of the biggest winners. of the coronavirus pandemic.

However, a recent recovery in so-called value stocks – disadvantaged stocks often found in economically sensitive industries – a benefited Great Britain. Sectors such as airlines, hospitality and finance exploded last month following news that vaccines developed by BioNTech / Pfizer and Modern were over 90% effective in Phase 3 trials.

The background music around the Brexit trade talks has soured in recent days, as the two sides discussed no-deal preparations. But some hedge funds remain bullish and a deal can be reached.

“There will be an agreement. All of sterling’s sensitive assets are undervalued, ”said Savvas Savouri, chief economist at London-based hedge fund firm Toscafund. He expects this to boost UK real estate stocks such as Land Securities and British Land.

“It’s free money without the uncertainty of Brexit,” he added.

Additional reporting by Katie Martin

laurence.fletcher@ft.com

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