By Josephine Mason
LONDON (Reuters) - Britain's blue chip stocks fell on Wednesday as a stronger pound lured investors toward cheap domestic companies and away from exporters after Prime Minister Theresa May's heavy Brexit defeat, while weak results weighed on Pearson.
The top share index ended down 0.5 percent at 6,862 points, lagging European peers as sterling hit its highest since November, a day after British lawmakers overwhelmingly voted against May's divorce deal with the European Union.
A loss had largely been priced in already, though its magnitude - a margin of 230 - came as a surprise.
The prime minister's historic defeat was seen as reducing the chance of a hard Brexit even as uncertainty ahead of a no confidence vote in May's government on Wednesday evening kept volumes muted.
"Uncertainty continues to reign. This is the harsh reality of progress during these unprecedented Brexit negotiations," said Richard Flax, Chief Investment Officer at Moneyfarm.
"We do still believe that the most likely outcome is that a deal is done before the UK leaves the bloc - whether that’s on 29 March, or after an eleventh hour plea to delay the day Britain leaves the EU, remains to be seen. But it's tough to have too much conviction about that."
Investors shunned consumer staples, which earn a big portion of their revenue abroad in foreign currency, with Unilever and Diageo dragging on the index. Heavyweight oil and gas stocks were down 1.5 percent.
The domestically focused midcaps, which make half of their income at home, gained 0.3 percent. Ireland's top share index, one of the barometers for Brexit sentiment, advanced 1 percent.
Investors have started tentatively to cover bearish short positions in banks, retailers and housebuilders, which are considered most at risk from a weaker UK economy amid Brexit uncertainty.
"I do think positions are being built for the domestic part of the market to become a bit more investible as the worst-case scenario becomes less likely," said Emmanuel Cau, head of European equity strategy at Barclays.
But it will take time before global investors return en masse even with UK stocks trading at a big discount to euro-zone and U.S. peers as investors digest a slew of headlines and data.
"People are still in wait and see mode and nobody wants to take a strong view because things can evolve very quickly from here," said Cau.
British inflation hit its lowest in nearly two years in December as fuel prices fell, leaving the Bank of England under no pressure to carry on raising interest rates as jitters over Brexit dominate the economic outlook.
Opposition Labour Party finance policy chief John McDonnell said that May could eventually get a deal through parliament if she negotiated a compromise with Labour.
Housebuilders led the gainers, with Bovis Homes providing additional cheer after it forecast better-than-expected full year profits.
Taylor Wimpey topped the FTSE 100 leader board while Persimmon, Barratt and Bovis were all at two-month highs. Bunzl dropped 1 percent after Exane BNP downgraded the supplies distributor.
In corporate moves, Pearson was the bottom of the board, down 5.9 percent, after its full-year outlook. The company's forecast for full-year profits was in line with expectations, but pointed to weaker-than-expected revenues.
Liberum analysts said the guidance was possible only due to a massive savings drive.
Investors shunned Reckitt Benckiser after it announced its chairman was retiring after more than 30 years at the firm. He is considered an architect of the company's push to become a global consumer health products company. Its shares fell 4.2 percent.
Among the small caps, floor covering distributor Headlam fell 1.3 percent after warning on profits.
(Additional reporting by Danilo Masoni and Helen Reid; Editing by Mark Heinrich)
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Updated Date: Jan 17, 2019 00:05:12 IST