British stocks have enjoyed a world-beating rally since the start of December, with international investors beginning to buy back into one of their least-loved countries.
The U.K. benchmark, the FTSE 100, is up nearly 8% since Dec. 1 in dollar terms. That puts it well ahead of the S&P 500, the MSCI World and the Euro Stoxx indexes, despite the U.K. being among the hardest hit by the Covid-19 pandemic.
The recent market rally doesn’t make up for its stark underperformance since the U.K. voted to leave Europe in 2016. In dollar terms, the FTSE 100 is still below where it closed on June 23, 2016, the day of the Brexit referendum.
Britain did manage to conclude a slim new trade deal with the European Union on Christmas Eve, eliminating fears that it might break away from the bloc at the end of 2020 with all its exports subject to tariffs and restrictions. But the bare-bones deal leaves much to be negotiated. The British pound hasn’t benefited either, confounding those who believe that U.K. assets are now more attractive.
As investors move money into U.K. assets, they need to buy the British currency, and that should lift the pound. Savvas Savouri, chief economist at Toscafund Asset Management, a $4 billion hedge fund, believes the pound’s fundamental value in euros is about €1.30 apiece. But since Dec. 23, it remained flat at €1.11 before rising to €1.12 on Wednesday.