British stocks have famously drubbed the rest of Europe since Brexit, but anyone capitalising on the rebound must have endured swings that made holding on impossible, right? Wrong.
In addition to beating other European markets on absolute terms, the 5.4% gain in the benchmark FTSE 100 Index since Britons voted on June 23 to leave the European Union is also the best when price swings are taken into account, data compiled by Bloomberg show.
A gauge of volatility expectations in London-listed equities headed for its lowest level since April, signalling optimism the gains will continue.
Not only are British mega-caps rising more than peers, they are sparing investors the wild swings that sent equities in countries from Spain to Italy down more than twice as much in the immediate aftermath of the vote to secede.
It’s another example of how the plunging pound has overwhelmed political concerns and sown optimism that Brexit will benefit the biggest London multinationals.
“Many of these companies benefit from the weaker sterling at least in translational terms, if not transactional,” said William Hobbs, the head of investment strategy at the wealth- management unit of Barclays in London. “They have profits from all around the world. We use the FTSE 100 as a part of a defence against potential further disruptions to the UK economy.”
Profit estimates at FTSE 100 companies saw the sharpest analyst upgrades in more than a decade in just over a week after the referendum, with JPMorgan Chase & Co estimating the firms make more than two-thirds of their total revenue overseas. At the same time, central bankers in England and Europe have said they’re ready to act to limit the fallout from Brexit, and bets for a Federal Reserve rate increase have been pushed back until at least the end of 2017.
Rising commodities have also helped buoy the FTSE 100.
On a risk-adjusted return basis, determined by dividing the total return by the degree of daily price variations, the FTSE 100’s 0.2% gain since the June 23 vote is the best among 18 western European markets.
Not everyone is optimistic that the short-term rebound means UK stocks have overcome the risks associated with the Brexit vote. In dollar terms, the FTSE 100 is still below its pre-Brexit level and has fallen more than the Stoxx Europe 600 Index. “I’d be cautious on UK assets at the moment,” said Philippe Gijsels, chief strategy officer at BNP Paribas Fortis in Brussels.
“This will be a long period of uncertainty. If you go out and it’s sunny, it doesn’t mean that tomorrow it won’t rain.”
Yet, the options market is signalling investor worries are easing.
The index of expected volatility in the FTSE 100 over the next 30 days fell 14% in London, set for its lowest level since April 21. The equity index entered a bull market Monday, extending its advance from a February low to 21%. Companies including Rolls Royce Holdings and Associated British Foods  have said the favourable currency translation will boost earnings.
Unilever, whose shares rallied since the Brexit vote to a record last week, is among the first FTSE 100 firms to report half-year earnings, on July 21.
“You look to fundamentals,” Hobbs, who has an overweight stance on UK stocks, said. “Companies like Unilever will continue to make profits no matter what happens to the UK economy.”