Ignore the wild swings – UK stocks are a buy

Bellway construction site © Alamy
Domestically focused UK stocks such as housebuilders would bounce on a Brexit deal

The FTSE 250 had its best day in nine years at the close of last week. News of “positive” discussions between Boris Johnson and Irish counterpart Leo Varadkar revived hopes of a last-minute Brexit deal.

The index, which contains medium-sized firms, surged by 4.2% last Friday. Sterling served up its best two-day performance in a decade, although that only took it back to where it was when Johnson entered Downing Street this summer.

Dublin’s stockmarket leapt 3.38% on the news, adds Gurpreet Narwan in The Times. The FTSE 100 index rose a more modest 0.8%. That is because not all of the UK’s largest companies would gain from a deal, says Bloomberg. A withdrawal agreement would trigger a big leap in the pound, which would weigh on the profits of businesses that make 70% of their sales overseas. Morgan Stanley analysts have noted that British pharmaceutical giants and some consumer goods exporters would actually take a short-term hit in the event of a deal. On the other hand, more domestically focused businesses, such as “beaten-down banks, housebuilders and retailers” would rise. The FTSE 250 companies make only half of their sales abroad.

Of course, as Ranko Berich of Monex Europe tells Philip Georgiadis in the Financial Times, “sterling is only ever as good as the latest headline”.

Yet whatever wild turn the Brexit drama takes next, the important thing to remember is that UK stocks are trading at bargain-basement prices.

With the FTSE 100 currently yielding about 4.5% and the FTSE 250 just over 3%, the London bourse offers some of the most generous dividend yields of any major market.

Current valuations suggest that investors willing to buy and hold for the long-term at these levels should enjoy good returns.