UK banks, homebuilders likely to rise after Brexit deal struck

[LONDON] UK lenders and homebuilders will be among sectors in focus after the European Union and the UK reached a Brexit trade deal.

Futures contracts on the FTSE 100 Index rose 1.3 per cent as of 7.10am in London.

European Union ambassadors gave the go-ahead to the bloc's draft free-trade agreement with the UK, paving the way for the deal to take effect on Jan. 1. The thumbs-up by EU member-country envoys sets the stage for formal approval by the 27-nation bloc's governments on Tuesday and for a vote by the UK House of Commons on Dec 30.

The pact should give rise to the "unwinding of the uncertainty discount" which has meant UK shares have been unloved since the 2016 referendum to leave the EU, Dan Nickols, head of UK small and midcap strategy at Jupiter Fund Management, wrote in a year-ahead outlook note prior to the agreement being reached.

The news comes after UK shares were hit last week by fresh pandemic restrictions and as several countries closed their borders with Britain after a new strain of the coronavirus was identified in the country.

The FTSE 100 index fell 1.7 per cent on Dec 21 before paring the decline later in the week as hopes of a Brexit trade deal grew.

The sectors most sensitive to the Brexit talks, which are predominately exposed to the UK economy, include: Domestic banks like Natwest Group, Barclays, Lloyds Banking Group and Virgin Money UK.

Other financial services firms like Hargreaves Lansdown and St James's Place, plus M&G and Aviva could also be active.

Housebuilders including Barratt Developments, Persimmon and Taylor Wimpey.

Commercial-property names like British Land Co and Land Securities Group.

Retailers including Tesco, J Sainsbury and Wm Morrison Supermarkets.

UK government contractors like Capita, Serco Group, Babcock International Group and Mitie Group.

European stocks that have a big exposure to the UK include Swedish kitchen maker Nobia AB (41 per cent of revenue), Dutch insurer Aegon NV (29 per cent), retailer Pandora A/S (20 per cent) and Spanish telecoms group Telefonica (15 per cent).

On the flip side, a jump in the pound after the deal may put pressure on the FTSE 100 companies with the biggest overseas earnings, particularly from the US.

That includes construction materials group Ferguson (88 per cent of revenue from the US), credit-data provider Experian (69 per cent), caterer Compass Group (61 per cent) and index heavyweights like spirits giant Diageo (47 per cent) and British American Tobacco (46 per cent).

The deal should provide a boost to UK equity returns, David Coombs, fund manager at Rathbone Multi-Asset Portfolios, said prior to the agreement.

However, rising unemployment and a weak economic recovery from Covid-19 may "put the dampeners on any Brexit deal-related positivity."

BLOOMBERG