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* FTSE 250 would rally 5%, pound 4% on deal passing - poll
* "Uninvestable" British assets starting to appeal
* But UK Plc not out of the woods; deal may yet fail
By Josephine Mason, Saikat Chatterjee and Joice Alves
LONDON, Oct 18 (Reuters) - Shares in London's UK-oriented
businesses, such as housebuilders and retailers, could rocket to
record highs if parliament approves the government's Brexit
deal, investors say. They also predict the pound will rally
around 5%.
British companies that earn most of their revenues at home
have been shunned by investors more or less since the 2016
Brexit referendum, as more than three years of uncertainty
damaged Britain's economic prospects.
Sealing the deal now, however, could send the second-tier
FTSE 250 index, a closely watched barometer of Brexit risk,
surging around 5%, an informal poll of analysts by Reuters
showed.
"If the deal is agreed (by parliament), there will be more
upside on rates, equities and forex," said John Normand, head of
cross-asset fundamental strategy at JP Morgan. "The stock market
may move up 5%, that will be the domestic names, which are not
exposed to currency strength."
Normand reckons sterling could strengthen up to 5% while UK
shares rise as much as 10% by the end of the year.
Parliament will debate on Saturday the last-minute agreement
between Prime Minister Boris Johnson and the European Union. But
Johnson's opponents in the legislature are trying to force a
Brexit delay or another referendum. He also lacks a majority,
meaning the deal may fail to pass.
But even then, investors don't see too much downside for the
pound and domestic UK shares, because the UK seems to have
averted the worst-case scenario of crashing out of the EU
without agreeing a Brexit transition deal.
That's pushed sterling around 5% higher in the past week
while the FTSE 250 has risen more than 6%.
Approval would remove some of the uncertainty that has
eroded confidence in UK Plc and pushed share prices and the
pound to trade at a big discount to global peers. Large overseas
funds that have steered clear of the UK since the June 2016
referendum may return.
Allocations to UK equities dropped to record lows of 7.46%
last month, according to Copley Fund Research, which tracks more
than 400 funds with $800 billion in assets under management.
That compares with an average of around 9.2% before the
referendum.
The FTSE 250 could rise 5%, pushing close to record
highs above 21,000 reached in April 2018, according to 16
analysts polled on stocks. Half the stocks in the midcap index
get their revenue at home.
For the pound, 23 financial institutions polled by Reuters
predicted on average that it would rise to almost $1.34 --
nearly 4% above current levels. The most bullish predicted the
currency would hit $1.40.
"Investors are still short (sterling) and simply covering
those shorts will push sterling above $1.30," Normand added.
"UNINVESTABlE"
Parliament's approving the agreement would mean UK equities
were no longer "uninvestable", according to brokerage Bernstein.
It has also moved to an "overweight" on European stocks,
naming a Brexit resolution as a "catalyst to bring money back
into European equities."
Already this week, investors have pounced on the most
beaten-down British stocks, from banks like RBS to
housebuilders and retailers Persimmon and Next.
The UK midcap stocks index hit one-year highs on Thursday
and last Friday soared more than 4% for its best day in more
than nine years.
Listed British stocks aren't out of the woods yet, however.
First, the likelihood of parliamentary approval appears
slim. Northern Ireland's Democratic Unionist Party, which props
up Johnson's minority government, said it would oppose the deal.
Deutsche Bank puts the chances of rejection at 55%. A rough
poll of 44 analysts in Reuters' Global Markets forum found an
even split between those that think the deal will pass and those
that do not.
And even if the agreement is passed, the reality of
navigating life after the European Union will set in. Businesses
and the economy will also need time to recover from the damage
inflicted by prolonged political tumult.
"Even if Boris Johnson does manage to close the deal,
investor celebration of this might soon be dampened by the
recognition that this is a fairly hard Brexit," said Paul
O'Connor, head of the multi-asset team at Janus Henderson.
"The UK now faces a long period of weak economic growth,
regulatory uncertainty and political scuffling with our largest
trading partner," he added.
That is reflected in currency derivatives, where gauges of
expected price swings in sterling are near the highest in more
than three years.
One thing is clear -- the recent dramatic gains in London's
tarnished markets have illustrate the pent-up appetite among
investors ready to bet that the worst of the political turmoil
in the world's fifth-largest economy may be drawing to a close.
(Additional reporting by Tommy Wilkes, Olga Cotaga, Julien
Ponthus and Danilo Masoni; editing by Sujata Rao, Larry King)
