To Vote or Not to Vote

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The entire Brexit saga is getting more pathetic by the day. Listening to May is like listening to a broken record. Now, focus has shifted to a May confidence vote.

70 years ago, Churchill wrote:

“We are with Europe, but not of it...We are linked but not comprised”

It seems the above has haunted the British in their relationship with Europe ever since. Ironically, should the Brexit happen, UK will need to deploy much more energy and effort to the EU than ever and the UK will need more EU experts than ever.

Earlier, in September, we outlined what sectors and stocks to watch out for given the hard Brexit possibility. The list follows below.

The GBP is sitting right on the huge 1.25 level.

 

The GBP/USD 1-month ATM volatility is up, but still actually trades slightly below recent highs. The market is currently pricing approx. 0.8% daily moves for the GBP/USD pair going forward.

 

People talk about the FTSE not trading so badly after all, but they don’t bother to look at it in terms of USD. In GBP terms the FTSE is down some 13% from year highs. Looking at it in terms of USD, the mighty FTSE is down 23% from year highs.

 

The list of the most vulnerable sectors and stock still remains very much in fashion.

Sectors to keep an extra eye on are; Travel and Leisure, Banks / Financial Institutions, Property Investment / Real-Estate / Construction Companies and Retail.

Companies predominantly affected are the ones that derive majority of their income domestically in UK, and in addition have substantial costs outside of UK in non-GBP. These companies would be most severely hit. Furthermore, companies who have large exposure to the UK consumer would take a beating. Below is a rundown of sectors and major companies in each sector that would be affected to keep an eye on:

Travel and Leisure: Post Brexit, UK based airline companies would have to re-assess their European routes to abide with EU laws. In addition, they would have to re-calculate fares, routes and costs of visas for their customers. Finally, a weaker GBP would make it more expensive for the British to enjoy vacations abroad. The main companies to focus on in this sector are;

  • EasyJet (EZJ LN)
  • IAG (IAG LN)
  • Thomas Cook (TCG LN)

Banks / Financial Institutions: If there is a hard Brexit – UK based banks will lose the business that is tied to EU. UK based banks will no longer be able to do EU related business unless they move their HQ. Subsequently UK based banks will mostly likely lose great part of their business with regards to the highly profitable investment banking space. Companies to keep on the radar are;

  • Lloyds Banking (LLOY LN)
  • Barclays (BARC LN)
  • Royal Bank of Scotland (RBS LN)

Property Investment / Real-Estate / Construction Companies: Housing markets are generally shaped by wages and interest rates. A hard Brexit would put pressure on wages. Increased trade barriers would make goods and services more expensive. Bank of England noted if a hard Brexit comes to fruition, the central bank would have to raise rates. This would have a negative impact on the large UK housing market.

Furthermore, if Brexit happens, EU companies that have big physical presence in UK would leave and take their employees with them. As a result, there would be increased supply of both office and residential properties in all of UK. Companies with big exposure to the general UK real-estate market are;  

  • Persimmon (PSN LN)
  • Taylor Wimpey (TW/ LN)
  • British Land (BLND LN)
  • Land Securities (LAND LN)
  • Travis Perkins (TPK LN)

Retail: An increase in consumer prices (see above) will lead to UK households having less disposable income to spend. The continued weakening of GBP would drive up costs for retailers as they import lot of the goods they sell. All of this would negatively affect consumer confidence which will hit the retail sector. Companies in retail to follow are;

  • Next PLC (NXT LN)
  • Dixons Carphone (DC/ LN)
  • Marks & Spencer (MKS LN)

 

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Source: all charts by Bloomberg