World Economy

Sterling Falls on Brexit Risk, But Shares Rise

Sterling Falls on Brexit Risk, But Shares RiseSterling Falls on Brexit Risk, But Shares Rise

Doubts are mounting about the future of the UK’s membership in the European Union, but you wouldn’t know it from the country’s stocks. Rather than being punished for a lack of certainty, they’ve become the most expensive ever relative to others in the region.

Valuation of companies in the FTSE 350 Index has climbed to 15.5 times estimated earnings, a record 7% premium to the Stoxx Europe 600 Index. While still down for the year, UK shares are beating everything else in Europe, and traders are expecting the market will remain less volatile, Bloomberg reported.

The discrepancy shows how little the so-called Brexit issue has bothered UK investors, partly due to the makeup of the London market, where energy and commodity companies have twice the presence as elsewhere in Europe. Along with a weakening pound, it’s adding up to a boon for a market that has trailed the region for the last four years.

“The rebound in metals and energy prices has really helped the UK market this year,” said Guy Foster, the head of research at Brewin Dolphin in London. “If you are going to get any big impact from ‘Brexit,’ it’s going to be a weakness in sterling, which will be supportive of UK equities.”

The FTSE 350, a broader measure of UK stocks than the FTSE 100 Index, has slipped 2.7% this year, compared with a 10% plunge in the Stoxx 600. That marks a reversal from a trend that began in 2012, when the high weightings in miners and energy companies then hurt UK equities. This year, Anglo American Plc, Glencore Plc and Randgold Resources Ltd. have risen the most in the region, with gains of more than 50%.

Bets against UK stocks have also fallen. Average short interest for FTSE 350 companies has dropped almost every week since Prime Minister David Cameron said in February Britain will hold a referendum on its EU membership, according to data from Markit Ltd. That means traders are either discounting the possibility of an exit or betting it won’t be as devastating as previously feared, said Simon Colvin, an analyst at the research firm.

While equity investors have remained relatively calm, the Bank of England has put the risk of a “Brexit” following the June 23 vote at the top of its list of near-term domestic threats. Data on Tuesday showed the nation’s expansion slowed in the first quarter, and growth will remain subdued in the next three months, according to Markit Economics.

Some stocks have already started to feel the repercussions. A JPMorgan Chase & Co. index tracking the companies deemed the most at risk has plunged 16% this year, reaching its lowest level since 2013 relative to the FTSE 350. The measure comprises 11 members, including retailer Next Plc and lenders Barclays Plc and Royal Bank of Scotland Group Plc.