The German bank says that most of this outperformance has been driven by European cyclicals performing better than defensive stocks, sterling’s recent stabilisation and a better-than-expected rebound in UK macro data after the sharp post-Brexit plunge.
These drivers, however, look like they have now run their course and the FTSE 250 should underperform the FTSE 100.
Analysts at Deutsche Bank write that after one of the sharpest rallies in cyclicals since 2010, performance has started to show some weakening in the face of deterioration in global macro surprises, while given their concerns over the global growth picture, UK macro data looks fragile and may “surprise on the downside”.
“While our FX strategists revised up their end-2016 GBP forecast earlier this month (from £/$1.15 to £/$1.25), their new target still implies downside for the FTSE 250’s relative performance,” they write.
“Furthermore, any increase in political tension around the Brexit negotiation is likely to lead to renewed GBP weakness, in our view, further weighing on the FTSE 250’s relative performance.”
The bank adds: “Recent developments suggest that Brexit-related uncertainty is intensifying. Recent commentary suggests that the likelihood of a “hard Brexit” (i.e., a complete withdrawal from not only the EU but also the single market) is rising. We agree with our FX strategists that uncertainty is likely to increase further as the difficulties around the Brexit process become clearer. After the initial relief of avoiding an economic shock following the referendum, we believe this increase in political uncertainty is bound to weigh on the UK macro picture and the currency, supporting our underweight on the FTSE 250.”
And the top five FTSE 250 companies that have outperformed the index since the July 5 trough are all on Deutsche Bank’s Hold or Sell lists.
Zoopla (LON: ZPLAZ) +21.4% – Hold
Hays (LON: HAYS) +21.2% – Sell
Redrow (LON: RDW) +19.7% – Hold
Bellway (LON: BWY) +19.6% – Hold
Crest Nicholson (LON: CRST) +18.3% – Hold
SOURCE: News.Markets
