Hedge funds transcend Brexit danger by betting on run-down UK shares

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Hedge funds are betting that UK equities can expect a rebound despite concerns about a trade deal with the EU before the end of the year.

After a largely miserable performance during the coronavirus crisis, some fund managers believe UK stocks will be one of the last places to find bargains in a world where ultra-loose monetary policy has driven asset prices soaring. This optimism comes despite growing uncertainty as to whether the UK and the EU will reach an agreement before the end of the Brexit transition period at the end of this month.

"We find stocks very cheap in the UK," Paul Marshall, co-founder of the hedge fund firm Marshall Wace, told the Financial Times. Sir Paul, whose company is one of the world's largest hedge fund groups with assets of USD 50 billion and who has clearly expressed the opportunities of Brexit in recent years, forecast a “major M&A” next year. Feeding frenzy ”encouraged by these low ratings.

While "some of the value is gone" as dilapidated stocks like telecom company BT and leisure company Whitbread have risen lately, "there are still a lot of bags of value in the UK," he added. In October, Marshall Wace announced a large position in British Airways' IAG, which has also partially recovered in recent weeks. A big bet against the British bank Lloyds has since been reduced to below 0.5 percent.

Other firms take similar bullish positions. The ratio of hedge fund bets on UK stocks going up versus UK stocks falling is at its highest in five years, according to a Morgan Stanley notice sent to customers this month.

The London-based FTSE 100 joined a global market rally last month, rising more than 12 percent in its biggest surge since 1989. Those gains followed this month, with the index adding another 4 percent on Friday, despite a wobble caused by mounting fear, over trade talks between the EU and the UK.

One fund that is already benefiting from this surge in UK stocks is Lansdowne Partners, based in London. The company has been a long-time fan of the UK and told investors in January that its "UK belief" was "very high".

That year, the company suffered heavy losses in its main Developed Markets Long Only fund, partly due to positions in the UK. However, last month it regained nearly 21 percent. That came out of numbers sent to investors and seen by the FT, and left it back less than 6 percent for the year. Lansdowne declined to comment.

Despite its strong November, UK stocks were a poor investment this year compared to the US. The FTSE 100 is down 12 percent in 2020 in U.S. dollars, trailing the U.S. S&P 500 index and Nasdaq 100 by more than 50 percentage points by about 25 percentage points, as investors consider U.S. tech companies more than some The biggest winners selected have been the coronavirus pandemic.

However, a recent rebound in so-called value stocks – unfavorable stocks often found in economically sensitive industries – has benefited the UK. Sectors such as airlines, hospitality and finance rose last month on news that vaccines developed by BioNTech / Pfizer and Moderna were more than 90 percent effective in phase 3 studies.

The mood surrounding the Brexit trade negotiations has worsened in recent days as both sides discussed no-deal preparations. However, some hedge funds remain optimistic that an agreement can be reached.

“There will be a deal. All sterling-sensitive assets are undervalued, ”said Savvas Savouri, chief economist at London-based hedge fund firm Toscafund. He believes this will boost UK property stocks like Land Securities and British Land.

"It's free money without the uncertainty of Brexit," he added.

Additional coverage from Katie Martin

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