* FTSE 100 down 0.5 pct; midcaps up 0.3 pct
* Pearson falls 5.9 pct after FY forecast
* Bovis Homes provides some cheer to homebuilders (Adds details, closing prices)By Josephine MasonLONDON, Jan 16 (Reuters) - Britain's blue chip stocks fellon Wednesday as a stronger pound lured investors toward cheapdomestic companies and away from exporters after Prime MinisterTheresa May's heavy Brexit defeat, while weak results weighed onPearson.The top share index ended down 0.5 percent at 6,862points, lagging European peers as sterling hit its highest sinceNovember, a day after British lawmakers overwhelmingly votedagainst May's divorce deal with the European Union.A loss had largely been priced in already, though itsmagnitude - a margin of 230 - came as a surprise.The prime minister's historic defeat was seen as reducingthe chance of a hard Brexit even as uncertainty ahead of a noconfidence vote in May's government on Wednesday evening keptvolumes muted."Uncertainty continues to reign. This is the harsh realityof 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 adeal is done before the UK leaves the bloc - whether that's on29 March, or after an eleventh hour plea to delay the dayBritain leaves the EU, remains to be seen. But it's tough tohave too much conviction about that."Investors shunned consumer staples, which earn a big portionof their revenue abroad in foreign currency, with Unilever and Diageo dragging on the index. Heavyweightoil and gas stocks were down 1.5 percent.
The domestically focused midcaps , which make half oftheir income at home, gained 0.3 percent. Ireland's top shareindex , one of the barometers for Brexit sentiment,advanced 1 percent.Investors have started tentatively to cover bearish shortpositions in banks, retailers and housebuilders, which areconsidered most at risk from a weaker UK economy amid Brexituncertainty."I do think positions are being built for the domestic partof the market to become a bit more investible as the worst-casescenario becomes less likely," said Emmanuel Cau, head ofEuropean equity strategy at Barclays.But it will take time before global investors return enmasse even with UK stocks trading at a big discount to euro-zoneand U.S. peers as investors digest a slew of headlines and data."People are still in wait and see mode and nobody wants totake a strong view because things can evolve very quickly fromhere," said Cau.
British inflation hit its lowest in nearly two years inDecember as fuel prices fell, leaving the Bank of England underno pressure to carry on raising interest rates as jitters overBrexit dominate the economic outlook. Opposition Labour Party finance policy chief John McDonnellsaid that May could eventually get a deal through parliament ifshe negotiated a compromise with Labour. Housebuilders led the gainers, with Bovis Homes providing additional cheer after it forecastbetter-than-expected full year profits.Taylor Wimpey topped the FTSE 100 leader board whilePersimmon , Barratt and Bovis were all attwo-month highs. Bunzl dropped 1 percent after ExaneBNP downgraded the supplies distributor. In corporate moves, Pearson was the bottom of theboard, down 5.9 percent, after its full-year outlook. Thecompany's forecast for full-year profits was in line withexpectations, but pointed to weaker-than-expected revenues.Liberum analysts said the guidance was possible only due toa massive savings drive.Investors shunned Reckitt Benckiser after itannounced its chairman was retiring after more than 30 years atthe firm. He is considered an architect of the company's push tobecome a global consumer health products company. Its sharesfell 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 ReidEditing by Mark Heinrich)