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LONDON — With the triggering of Article 50 imminent, Deutsche Bank has put out a note advising clients on how to make money from the huge political event.
Theresa May is set to trigger Article 50, which formally begins the two-year process of Britain leaving the European Union, by the end of March. Monday, March 27 is widely tipped as a likely date for the event.
In a note sent to clients on Monday titled "The Brexit trades: how to play Article 50," Deutsche Bank advises clients to short the FTSE 250 and invest long in the FTSE 100.
The logic for the positioning is that Deutsche Bank thinks the pound has further to fall and the triggering of Article 50 could provide a catalyst for sterling taking a leg down. Andreas Bruckner and his team write: "Our FX strategists expect a further 6% depreciation of the GBP trade-weighted index (TWI) by year-end, with the likely triggering of Article 50 over the coming weeks a key bearish catalyst."
The FTSE 250 stock market is primarily made up of UK companies that report earnings in pounds, so a fall in sterling is bad for the index.
The FTSE 100, meanwhile, is dominated by international conglomerates and multinationals that report earnings in dollars. So if the pound falls relative to the dollar, then stock looks cheap and entices buyers to push the price up.
Deutsche Bank says: "With 60% of sales coming from outside the UK, the FTSE 100 tends to outperform when
the sterling weakens – and our FX strategists’ forecast would be consistent with a further ~8% relative upside for this trade."
Sterling is down 16% against the dollar since last June's vote to leave the European Union. The FTSE 100, meanwhile, hit a fresh record high this week.
The FTSE 250 underperformed by 12% in the wake of the vote but has since recovered and is up around 18% since last June. Deutsche Bank says: "If the triggering of Article 50 translates into a renewed rise in uncertainty and a further drop in sterling, we would expect the FTSE 250 to underperform again."
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