(Bloomberg) -- Euro-area stocks would stand to gain more from a Brexit deal by the end of this month than U.K. shares, JPMorgan (NYSE:JPM) Cazenove strategists said.
While such a scenario would be bullish for domestic British companies, a strengthening of the pound would take away much of the upside for U.K. equities, strategists led by Mislav Matejka wrote in a note. Euro-zone shares, however, would be a “big potential indirect beneficiary,” they said.
JPMorgan (NYSE:JPM) on Monday reiterated its overweight stance on euro-area equities, while maintaining an underweight position on U.K. shares. In addition to a potential Brexit-deal boost, euro-area stocks are under-owned and trading cheaply on most valuation metrics, while speculation is mounting for fiscal stimulus in the region, the strategists said.
The U.K.’s benchmark FTSE 100 Index has tended to move inversely to the pound since the 2016 referendum to leave the European Union, thanks to a heavy weighting of exporters that benefit from a weaker currency. Last week, a stronger pound and a slump in commodities dragged the gauge to its worst drop in almost a year.
JPMorgan’s base case is for the Oct. 31 deadline to be pushed out to January-February, with early elections likely, but the strategists cautioned that “one shouldn’t ignore the likelihood that Boris Johnson gets his deal through in October.”
Prospects of a breakthrough ahead of the deadline faded again over the weekend as talks between the two sides stalled. The EU has indicated that proposals made by Prime Minister Johnson last week to resolve the impasse won’t cut it.
The FTSE 100 has underperformed the Euro Stoxx 50 Index this year amid lingering uncertainty about the timing and details of Brexit.