Big British Stock Winners on Divorce-Deal Optimism

Investors have grown optimistic about the U.K. reaching a divorce deal with the European Union (EU) in the near term. U.K. Prime Minister Boris Johnson and Irish Prime Minister Leo Varadkar discussed ways of reaching a solution to Brexit negotiations following a diplomatic standoff over dodging a hard border appearing on the island of Ireland after Brexit.

Johnson said recently that “getting Brexit done by 31 October is absolutely crucial, and we are continuing to work on an exit deal so we can move on to negotiating a future relationship based on free trade and friendly cooperation with our European friends.”

In fact, European Council President Donald Tusk has confirmed that for the first time he believes that there is a “pathway to a deal.” Thus, a Brexit deal is widely expected to be passed by the Parliament since Eurosceptic lawmakers now believe that Johnson will have a better understanding with the EU than his predecessor Theresa May.

EU officials, by the way, have confirmed that Johnson was prepared to make a lot of concessions to initiate elaborate discussions. In fact, teams from both the sides have started to explore ways to arrive at an accord ahead of the EU summit that begins on Oct 17.

The divorce-deal optimism has helped the pound scale northward. The currency registered its biggest two-day gain on Oct 11 since December 2008, having jumped 3.6%. Lest we forget, the currency had declined nearly 15% since 2016’s EU referendum vote, while the greenback had strengthened.

However, the pound strength against the U.S. dollar hasn’t gone down well with U.K.’s large caps, like oil majors and pharmaceutical bigwigs, as it makes their exports more expensive. But, there are some sectors and stocks in the U.K. that are gaining from the divorce-deal optimism —

Shares of U.K. Banks Advance

U.K. banks, in particular, saw their shares collectively increase more than 10% on hopes that a Brexit deal could avert further weakening in the British economy. International players like Barclays plc BCS saw its shares rose 6.8%.

Meanwhile, domestically-focused institutions like Lloyds Banking Group plc LYG should now breathe a sigh of relief. After all, such banks would have been affected the most in case of any economic downturn owing to a no-Brexit deal.

Other domestic players including Royal Bank of Scotland Group plc, Lloyds Banking Group plc and CYBG plc have all seen their shares gain traction.

Home Builders Gain

Rumors about a no-Brexit deal had been weighing on homebuilder stocks for quite some time now. But, now firms that build houses are among the best performers in the U.K., predominantly due to the expected Brexit deal.

This has surely helped outweigh concerns that have been plaguing homebuilders like the lack of affordability. Notably, shares of homebuilder Persimmon plc and Taylor-Wimpey plc as well as construction-materials firm Travis Perkins have rallied. In fact, HSBC Holdings plc Brijesh Siya had said earlier that “we believe Taylor Wimpey in particular is best-placed amongst U.K. housebuilders to gain from a post-Brexit market bounce back.”

Retailers Rev Up

The prospect of the U.K. exiting the EU without a deal and a subsequent drop in pound may have resulted in higher inflation. This, in turn, could have affected purchasing power and consumer spending, something that doesn’t bode well for retailers. A weaker pound, by the way, leads to higher import cost for retailers.

Thus, an expected Brexit deal helped retailers like Next plc NXGPY and Marks & Spencer Group plc MAKSY gain ground at a time when they are grappling with the encroachment of big e-commerce players like Amazon.com, Inc. AMZN. You can see the complete list of today’s Zacks #1 Rank stocks here.

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