By Joice Alves and Ritvik Carvalho
LONDON (Reuters) - A surging pound is failing to hold back Britain's exporter-heavy blue-chip FTSE 100 in 2021, as its impact is outweighed by expectations vaccine rollouts will boost global economic growth and commodity prices will rise.
Sterling, the best performing G10 currency in 2021, has risen to near its highest in three years as global investors chase assets in countries whose vaccine programmes are ahead, and on some relief that a Brexit deal was agreed.
Reflation trade's big FX winner: GBP https://fingfx.thomsonreuters.com/gfx/mkt/xegpbwwjavq/Pasted%20image%201614352698966.png
The British currency and the FTSE 100 tend to move in opposite directions. Almost 80% of UK blue-chip firms' revenues come from abroad and a stronger pound makes them less competitive, while their stocks become pricier for overseas investors.
But the FTSE 100 is the best-performing equity market in 2021 even as sterling rallies, which would usually hit company earnings projections.
Analysts say both sterling and the FTSE are poised for growth, as an economic boost from vaccination rollouts and a rebound in commodity prices, which particularly helps the resource-heavy FTSE, outweigh the impact of a strong pound on stocks.
FTSE 100 outperforms in 2021 https://fingfx.thomsonreuters.com/gfx/mkt/azgpoeenqpd/Pasted%20image%201614352019979.png
"If a really strong recovery takes hold, with commodities prices in the vanguard, the pound’s influence could prove to be less powerful than the earnings and dividend streams of the big miners and oil producers," said Russ Mould, investment director at AJ Bell.
Goldman Sachs (NYSE:GS) analysts, bullish on oil and copper prices, see further FTSE support from rising commodity prices.
Expecting a potentially expansionary UK budget on Wednesday and seeing a very slim chance that the Bank of England will cut interest rates, the U.S. bank sees sterling outperforming.
This isn't the first time the negative correlation between sterling and the FTSE has broken down -- during the March 2020 COVID-19 market crash both tumbled.
Past breakdowns of sterling/FTSE inverse correlation https://fingfx.thomsonreuters.com/gfx/mkt/nmopazzwzva/Pasted%20image%201614353406637.png
Sterling and UK stocks remain at the mercy of global investor sentiment. When broader markets slide, British assets suffer, especially given the UK's sizeable current account deficit, so the twin rebound may rely on a benign market backdrop.
But valuations look attractive for British blue-chip stocks, which trade at 14.6 times 12-month forward earnings, a far cry from the MSCI all-country world stocks index's 20x, according to Refinitiv data.
"The UK market has been a serial underperformer for some time," Mould said. "If we get an inflationary recovery, then the UK could be just what investors are looking for: plenty of exposure to a cyclical upturn, especially via commodities; cheap, after its underperformance."
UK stocks are one of the cheapest https://fingfx.thomsonreuters.com/gfx/buzz/xlbpgdxokvq/Pasted%20image%201614606585320.png