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Brexit: The investment impact one week on

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By now I’m fairly sure that you’re suffering from Brexit fatigue; I know I am. So I’m going to keep this as short as possible and then, hopefully, avoid the topic for a while.

The initial impact of the vote to leave the EU was, perhaps unsurprisingly, to induce a state of almost blind panic. Of course that was simply an emotional response; a knee-jerk overreaction which any good student of the markets should have expected.

However, investors have now had one full week to think through the implications of our collective decision to leave the EU, so I think now is a good time to pause and take a look at what the aggregate wisdom of investors has come up with:

The FTSE 100 is up by about 1%

I’m writing this on the afternoon of Thursday 30th June and Google tells me that the FTSE 100 is at 6,388, almost 1% higher than where it stood as the referendum votes were being counted a week ago.

And so it seems that, having had some time to reflect, investors are not especially worried about the impact of Brexit on most of the large-cap international stocks which make up a significant portion of the FTSE 100.

The FTSE 250 is down by about 8%

In contrast and as expected by most pundits, the FTSE 250 has fared significantly worse than the FTSE 100.

The obvious reason is that the mid-cap FTSE 250 is much more UK-focused than its large-cap sibling. As a result, any negative impact that Brexit may have on the UK economy will be reflected far more in the FTSE 250 than the FTSE 100.

In numeric terms the FTSE 250 is down from a pre-Brexit level of 17,334 to 16,014; a total decline of almost 8%.

However, an 8% decline is not exactly a harbinger of doom, and neither was the 13% decline which the FTSE 250 managed briefly last Monday.

If the market had fallen by 50% then there would be something to shout about, but so far? Not so much.

Defensive and commodity sectors see post-Brexit gains

Only six out of 39 sectors are up across the FTSE All-Share. Those sectors are:

  • Tobacco (defensive): Up 8%
  • Mining (cyclical): Up 6%
  • Utilities (defensive): Up 6%
  • Oil & Gas Producers (cyclical): Up 4%
  • Pharma & Biotech (defensive): Up 3%
  • Mobile Telecoms (defensive): Up 2%

My guess is that defensive stocks have gone up in price because they’re less likely to be hurt by a downturn in the UK economy, either because they are defensive or because they are both defensive and make most of their profits overseas.

Cyclical commodity-related stocks may have increased in value because they tend to be very internationally focused, and so again any decline in the UK is less relevant. Also, their products are priced on international markets, so the post-Brexit fall in the value of the pound could increase their profits, at least in Sterling terms.

That’s my guess anyway; such macro-factors are not really my area of expertise.

Perhaps more importantly, I don’t see any sector which has obviously increased in value because of an expected improvement in the UK economy post-Brexit.

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Instead, the gains all seem to be in sectors that are best placed to avoid post-Brexit pains.

Banks, real estate, retail and leisure sectors see biggest post-Brexit losses

Here are the gory details of the sectors which have been hardest hit by the referendum result so far:

  • Home Construction: Down 23%
  • Banks: Down 21%
  • Real Estate: Down 15%
  • Construction & Materials: Down 14%
  • General Retailers: Down 13%
  • Travel & Leisure: Down 13%

These are all cyclical sectors and are more UK-focused than the sectors that have done well, so it is no real surprise to see them hit by an event which – in the eyes of most experts – has increased the chances of a UK recession.

In addition to the usual consequences of a recession (if we get one), Banks could be hard hit as they are major exporters to the EU and, according to some research, “Banks outside the EU, even in Switzerland, get only limited cross-border access [into the EU]”.

The same argument applies to the insurance sector (down 11%) and the financial services sector (also down 11%).

As for construction and real estate, according to those who know far more about the subject than I ever will, the construction industry: “will be profoundly affected by the result of the referendum” because of:

  • Wage increases (due to labour shortages)
  • More expensive imported raw materials (thanks to the falling value of the pound and new import tariffs)
  • Reduced foreign investment (thanks to the UK no longer being a “gateway” to the EU for foreign investors)

A possible recession, higher wages and higher raw material costs are also cited as potential negatives for retailers, including those in the General Retailer sector as well as the many restaurants and similar businesses within the Travel & Leisure sector.

These are uncertain times indeed.

Bargain hunting in a post-Brexit world

As a value investor I’m bound to say there will be bargains among those stocks that have seen the greatest falls.

I think there will be, and I wouldn’t be in the least bit surprised if I ended up buying a few companies, at bargain valuations, which had been hurt, at least in the short-term, by the Leave vote.

However, as I said recently, diversification is (almost) everything. I will not be jumping whole-heartedly into home builders, banks, airlines or restaurants, even though the share prices of many of these companies have been crushed.

Perhaps a retailer here, a transport company there, but always in moderation.

Selling the Brexit winners

Most investment commentators are talking about what bargains to pick up, but what doesn’t seem to get mentioned (does it ever?) is what potentially overpriced stocks we should be selling.

The obvious candidates are stocks from sectors that were in favour before the referendum and which have become even more popular afterwards, or at least have not suffered very much.

So potential sell candidates could come from popular sectors such as Personal Goods (e.g. Unilever), Beverages (e.g. SABMiller) and Health Care Equipment (e.g Smith & Nephew).

These are defensive and internationally-focused sectors that have been in favour for a long time and whose stocks, in many cases, are trading on lofty valuations.

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These sectors were barely hurt by the Leave vote and so, relative to other sectors that have fallen, are trading on even less attractive valuations now than they were before.

Personally I wouldn’t be at all surprised if I ended up selling some companies whose share prices have increased post-Brexit in order to purchase companies whose share prices have collapsed.

But, as ever, I will be maintaining a balanced and diverse portfolio at all times.

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Comments

  1. Hi, John,
    I think that is fair comment. The recent price movements do provide a chance to re-balance, perhaps even a rare golden opportunity. As always both greed and fear have probably been overdone and I have already sold ULVR and increased my existing holding in LLOY and some housebuilders. My investing principle is to buy and hold for the long-term stocks that have attractive and reliable dividends and, although I may be wrong, I am betting that there will always be such high demand for houses that the housebuilders will not suffer greatly. Most of them could cut their latest dividends by half and still look very attractive at current levels. As always, of course, only time will tell but careful stock picking from amongst the (probably) over-sold stocks likely to prove the most rewarding way forward.

    • Hi Chris, unfortunately none of the housebuilders show up on my stock screen as they all suspended dividends after the credit crunch, but yes I totally agree with your general sentiment: attractive and reliable dividends are what most active investors should be focused on.

      • What about Galliford Try Plc? That’s construction and has a good dividend and has fallen recently pre and then lots post brexit?

        • Hi Oliver, yes that one makes it onto my list. At first glance it looks attractive because of the 7% yield, but there are obvious risks to that dividend given the potential for a slowdown in the housing market.

          After the financial crisis the company cut its dividend in half, but within a few years it was blasting through to new highs. However, I wouldn’t be in the least bit surprised if the dividend ended up being chopped in half again.

          Having said all that, I haven’t looked at the company in detail so I don’t have a strong opinion.

  2. Ciao John,
    As you know I have quite a bit of my portfolio invested in the UK, but at the moment I haven’t made up my mind on what to do. The aftermath of Brexit was mostly “selling the enws” but nothing has changed in real terms. I am waiting for some signal as the situation looks pretty stalled, the Leave campaigners don’t seem to have a plan for the future and this creates even more uncertainty…
    I think it’s going to be a long wait still, at least until October…
    Cia ociao
    Stal

    • Yes I’m sure you’re right. Other than the odd crisis-driven headline, it could be years before we get any real sense of how the strength of the UK economy has been affected (either positively or negatively).

  3. Hi John,

    As I’ve been annoyingly banging away to my readers all week (their annoyance and mine! 😉 ) the difference between the FTSE 100 and the FTSE 250 is in large part down to currencies. As a generalisation, FTSE 100 dollar earning multinationals have done very well, and FTSE 250 Sterling-earning UK cyclicals have been walloped.

    Remember, the pound has fallen over 10% against global currencies in the immediate aftermath. (Source: Bloomberg). For many companies this is going to automatically bump up their earnings, assuming it holds.

    As to which cohort the better value at these new prices, I look forward to your thoughts in the weeks ahead! 🙂

    best
    The Investor

      • Hi Staginvestor, the FTSE 350 is simply the FTSE 100 and 250 combined, and is made up about 80% of the FTSE 100, so I haven’t checked but I guess it would be impacted about 80/20 by the factors driving the FTSE 100/250.

        As for AIM, I don’t look at or invest in AIM stocks so I don’t have an opinion. Sorry.

    • Hi TI, yes agreed, major factor in 100/250 difference is national versus international focus and therefore currencies.

      I will be watching the price of petrol closely in the coming weeks!

  4. John,

    One point to add here is that we are not really post Brexit, we are post the referendum on whether the general public would like the UK to remain or leave the UK.
    The public want the latter by a margin, I’m personally also in favour on a long term basis, as I anticipate and hope the EU will die and free up Europe for the better.

    However, the legal mandate to carry out the public’s will lies with Parliament, and the politicians representing parliament and the voters have not covered themselves in glory in this last few weeks, with some proclaiming lies and others offering false promises and even plotting to undermine their own colleagues within the same party (Labour and Conservative). They have also engineered to get rid of the main Brexit candidate – Boris Johnson.

    To get to Brexit the MPs have to vote on it, they then must get someone to start the process by signing Article 50, the next PM, as the existing PM went missing in action and reneged on his promise to carry out the mandate of the people. He made that promise of course when he was confident of a remain vote.

    So even if we sign Article 50 (I guess October earliest) we have two years of incredible “negotiations” in order to extract ourselves from the EU. During that time, there is no knowing what powers the weak politicians might hand back to Brussels because they are fearful of them and imagine they will not get a free trade. The UK representatives are poor at negotiating, and would be best served by sending a polite letter to Germany and France stating we will accept free trade and no other conditions.

    The UK has form on this, since 70 requests for change by the UK have been made over the lifetime of our EU membership and we have been given 70 rejections.
    The UK should not, and does not need to negotiate – The German auto industry can not live without one since 20% of their EU exports go to the UK and the UK is the most profitable part of their industry.

    It’s an autocracy and no one seems to want to admit it.

    In essence, we are not Brexit until we Brexit — possibly almost 3 years away.

    Long rant, but if we get Brexit, the strength for the UK companies is lighter regulation and possible better direct trade terms with 80% of the world that is not in the EU.

    • Hi LR, point duly noted – we are not Brexit but simply post-referendum, although I would guess that most readers of this blog would understand what I mean by post-Brexit.

      Also, given that this is about the UK, Brexit is the wrong name anyway; it should be Ukexit, although that is far less catchy.

      One minor point, although I don’t want to argue the toss:

      “The public want the latter by a margin”

      I think the margin was tiny at just 2% of the vote. If 52 people out of 100 voted for something I wouldn’t say that’s a wide winning margin; I’d say it was a very narrow win.

      But a win is a win and in all likelihood we are in for many years of change and uncertainty.

      Let’s hope it all works out in the end.

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