Going long FTSE 100 versus 250 may be a hedge on Brexit, says Credit Suisse

Going long the FTSE 100 relative to the FTSE 250 is a potential hedge on a Brexit, said Credit Suisse, adding that it would be cautious of sterling heading into the 23 June referendum.

The bank said that while opinion polls suggest a 44% chance of a Brexit, only 13% of the respondents in its most recent client survey believe the UK will vote to leave the European Union.

“A Brexit could generate a Conservative leadership election, or at least party disunity. We would also expect the effects of a Brexit to spill over into the euro area, leading to increased European political risks, especially when the Netherlands and Italy have anti-EU parties that are the most or second-most popular domestically.”

In its latest global equity strategy note, Credit Suisse recommended investors go long the FTSE 100 versus the FTSE 250, highlighting better large cap fundamentals and their greater international exposure.

The bank remained ‘benchmark’ on the FTSE 100, saying global emerging markets, sterling and commodities are the key drivers.

“Valuations are not particularly attractive, but weaker sterling and high exposure to GEM offset this. Positioning has generally been mildly cautious,” it said, adding that its year-end FTSE 100 target remains 6,600.

In addition, the bank said it remains a mild sterling bear, noting the pound was pricing in a Brexit probability of around 25%.

“Although sterling has weakened significantly over the past year, we would still, on balance, retain a negative view towards the currency. Taking current market-implied probabilities of the two possible referendum outcomes and applying a probability-weighted average gives modest downside to the currency from current levels.”

The bank upgraded the UK retail sector to ‘benchmark’ from ‘underweight’ and slightly reduced its ‘underweight’ in UK real estate investment trusts.

It attributed the retail upgrade mainly to valuation, but also said retail sales and earnings momentum look to have troughed.

As far as UK REITS are concerned, it said the renewed fall in bond yields has been a support for the sector, with its performance re-coupling with the corporate bond yield. In addition, the bank’s credit strategists reckon UK corporate credit is reasonably attractive at current levels.