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Domestic revenge ignites in UK stocks as Brexit D-Day averted

[LONDON] A can kicked down the road is better than one that explodes in your face. And so, in stock markets at least, people are feeling more relaxed about Brexit than for some time.

With UK Prime Minister Theresa May agreeing to possibly postpone the March 29 scheduled departure date if her deal fails and, at the same time, the odds for her success growing, a no-deal Brexit - markets' worst-case scenario - is looking less likely by the day. The relief is palpable in domestic shares, which are rallying and luring back some cash.

"To some extent this is risk deferred, rather than risk reduced," said Michael Ingram, chief market strategist at WH Ireland in London. "The end game is far from clear, but it is highly likely that March 29 will not be D Day."

Hats off to the banks who already turned bullish on UK domestic shares: Morgan Stanley, JPMorgan, Citigroup and Barclays. Those stocks have jumped versus their more global peers since mid-February as investors re-priced the former's depressed valuations and the pound rallied.

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Meanwhile, good news on Brexit has driven London-listed global companies lower, given their negative correlation with sterling. The FTSE 100 has gained almost 6 per cent this year, trailing the FTSE 250's 11 per cent advance.

Emmanuel Cau, a strategist at Barclays, reckons the local trade still has legs, citing elevated short interest in those shares, their low valuations and the potential for economic activity to accelerate as the risk of a chaotic Brexit recedes.

Flows have followed suit. Exchange-traded funds tracking the FTSE 250 have drawn US$648 million of inflows so far this year, or 20 per cent of their assets, compared with 3 per cent for the FTSE 100 and nearly zero for global equities, data compiled by Bloomberg show. Both the two biggest ETFs following the mid-cap benchmark have posted record monthly inflows this year.

Even notoriously low equity positioning in the UK has turned less dismal since Parliament's Jan. 16 rejection of May's original deal increased hopes of a delay in Brexit, according to Barclays. And short interest has dropped.

Among domestic stocks, all the usual Brexit-sensitive suspects have outperformed this year -- think homebuilders, local banks and retailers. The FTSE 350 Banks Index has been dragged down by declines in the more global HSBC Holdings, but both Royal Bank of Scotland Group and Lloyds Banking Group have gained at least 22 per cent in 2019.

But as usual with Brexit, any optimism requires not thinking too far ahead.

"More delay means kicking the can down the road, longer uncertainty, a loss of confidence and a wait-and-see attitude regarding spending and investment decisions," said Alexis Charveriat, who manages Financiere de la Cite's Brexit stock fund from Paris. "It opens the door to more political instability."