Banking and housebuilding stocks remained the biggest gainers on the FTSE (^FTSE) at market close on Thursday, with optimism about a looming Brexit trade deal boosting shares.
“If this deal is done (and it won’t be the end of Brexit completely) then a lot of the cloud that hangs over the UK economy is removed – and banks like Lloyds and housebuilders stand to benefit from a more positive outlook on the UK economy,” said Chris Beauchamp, chief market analyst at IG.
Despite the immediate Brexit optimism, some underlying concerns loom large for firms, particularly the economic fallout of COVID-19 and a new strain that has forced tighter lockdowns and hit UK stocks earlier this week.
The fate of banks, housebuilders and other so-called cyclical stocks are typically closely linked to the fortunes of the wider domestic economy as a whole.
The backdrop is one of significant uncertainty and challenges as the government tries to curtail rising COVID-19 case numbers and increased restrictions hammer firms.
The latest official figures show the number of redundancies reached a record high in October.
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A distressed economy will leave more homeowners or aspiring homeowners struggling to repay mortgages or taking out new ones to buy, slowing down housing demand and construction for UK builders. Equally, banks will be forced to deal with more arrears and lower lending, undermining their profits.
“Of course the challenge of Covid remains, so we shouldn’t expect a sudden release of pent-up energy,” said Beauchamp.
Anticipating a deal, he added: “But the chaos of a no-deal has been avoided, along with the incalculable aftershocks of such an outcome. And as a result the UK economy should do better, bolstering lending activity for banks and providing support for house prices and home buying.”
Still, at least in the medium term, UK housebuilders and bank stand to be among the greatest beneficiaries of a deal, according to analysts.
“The banks trade at discounts to net asset value and the builders are also still looking fairly cheap on a book value basis, on average at least, so they are a cheap and geared play into the UK economy,” said Russ Mould, AJ Bell investment director.
“Investors are clearly hoping that a Brexit deal will unblock corporate investment that may have been delayed, spare consumers tariffs and increase their purchasing power and give the economy a boost at a time when it still desperately needs it.”
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