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U.K. Domestic Stocks Could Drop 10% If Deal Fails, BNP Says

Joe Easton

(Bloomberg) -- Stocks with heavy exposure to the U.K. economy could wipe out the rally seen over the past week if lawmakers reject Prime Minister Boris Johnson’s Brexit deal on Saturday, according to BNP Paribas.

The bank forecasts downside of as much as 10% for the FTSE 250 index in such a scenario, with the exporter-heavy FTSE 100 gaining amid weaker sterling, strategists including Edmund Shing wrote in a note to clients.

The FTSE 250 domestic gauge has risen about 5% since last Friday as the U.K. and European Union edged closer to the agreement on a separation that was announced on Thursday. The benchmark was up 0.3% at 1:45 p.m. on Friday.

Domestic stocks could add another 5% if the agreement passes unchanged through Parliament, while the scenario of the deal being subject to a second referendum would be even better as it would open up the possibility of remaining in the European Union, BNP Paribas said.

The bank sees a vote on an unamended deal “probably close to 50-50, with our bias being towards it being rejected,” said Paul Hollingsworth, an economist at BNP Paribas. In terms of ultimate Brexit outcomes, both a deal and revocation have increased in likelihood, while the probability of no deal has decreased, the bank added.

The FTSE 250 will probably retrace some recent gains if the deal is voted down on Saturday, rather than deliver a “major pullback,” according to asset manager Janus Henderson. An initial rejection of the agreement would eventually result in “Boris Johnson’s Brexit” after a general election, Paul O’Connor, head of the firm’s U.K.-based multi-asset team said in emailed comments.

In a bullish signal for U.K. domestic stocks, data compiled by Bloomberg show the Vanguard FTSE 250 UCITS exchange-traded fund has attracted about 81 million pounds ($104 million) so far this week, the largest inflow since January.

(Adds asset manager comment in sixth paragraph, updates index price.)

To contact the reporter on this story: Joe Easton in London at jeaston7@bloomberg.net

To contact the editors responsible for this story: Beth Mellor at bmellor@bloomberg.net, Jon Menon, Celeste Perri

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