As European Union leaders forge a historic rescue deal to save the bloc's weakest economies, Brexit talks continue to fail in making any progress. By almost every market metric, investors are rewarding European unity and punishing the UK's intractable problems.
The euro is near the highest since early 2019, Germany's DAX Index is almost positive for the year and the Stoxx Europe 600 Index has added $3.5 trillion in market value since the mid-March lows.
In Bank of America Corp.'s latest fund manager survey, investors raised their allocation to euro-zone equities by 9 percentage points, the largest increase in weighting for any region.
By contrast, the UK remains deeply unpopular. The pound has weakened this year, and FTSE 100 Index stocks are down 17% in 2020. The pound is only one of two major currencies where short positions outnumber longs, according to Scotiabank. In the Bank of America survey, UK was ranked as the most disliked region.
Money managers say the UK is a dangerous place to invest because of the impending cliff edge of a no-deal Brexit at the end of the year, when the transition period ends and tariffs potentially kick in. Negotiators for the UK and Europe say the chances of a deal being reached by the end of August are fading fast.
"There are also a lot of UK-specific things that can push the pound lower," said Mike Riddell, a money manager at Allianz Global Investors, who is shorting the pound versus the Japanese yen. "If those risks are realized, namely a no-deal Brexit, then you could be looking at 10% or more sterling downside."
The pound's volatility has also kept investors away. In a June report, Bank of America Merrill Lynch said Britain's economic position made sterling resemble an emerging-market currency and described its recent swings as "neurotic at best, unfathomable at worst."
"We are on the sidelines," said Joubeen Hurren, a money manager at Aviva Investors. "With Brexit, it's very hard to make a call still. There are many paths negotiations could go down."
Six-month risk reversals in the pound versus both the yen and the dollar, a gauge of market positioning that covers the year-end Brexit deadline, show investors are anticipating a weaker pound.
All of the negativity around UK equities could be overdone, according to strategists at JPMorgan Chase & Co. The bank has dropped its bearish view and said stocks are cheap by most metrics. The softer pound could support earnings at FTSE 100 Index companies, which get nearly 80% of their revenue from overseas.
It's too soon to bet on a comeback just yet, says Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management.
"Do I want to invest in the UK over the next three to five years? Probably, yes," she said. "But over the next six to 12 months, it's harder until I know what the terms of trade are."