A hard Brexit seems more likely post the recent breakdown of negotiations between UK and the EU. Companies with large UK domestic exposure will potentially be negatively impacted with major hits to earnings and subsequently falling share prices.
With a weaker GBP, higher rates, lower wages, sectors to keep an eye on are; Travel and Leisure, Banks / Financial Institutions, Property Investment / Real-Estate / Construction Companies and Retail.
As we noted earlier the risk of a hard Brexit is higher than it has ever been. UK and the EU seem all but getting closer to a deal. Theresa May and her conservative government have insisted to the UK public that UK would get access to EU’s single market, continued unrestrained travel for UK citizen to EU countries amongst other things. EU on the other side, have maintained that with the Brexit vote, UK have decided to leave the Union and subsequently would not have access to the same benefits as before.
Speaking from 10 Downing Street on Thursday, Theresa May admitted that the negotiations with the EU had completely stalled. She said that if EU does not come to terms with UK “demands”, the UK was prepared to walk away without a deal. From a market perspective, this “hard Brexit” situation would be the most devastating outcome. The media and markets are highly critical of May and her negotiation approach, as it has been clear from day one that her demands would be unacceptable to EU.
With hard Brexit as the more likely outcome, it is advisable to take a closer look at stocks that are more likely to get affected by such a hard Brexit. First and foremost, 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 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)
For additional companies, with both positive and negative exposure to Brexit, CBOE Bats Brexit High 50 and Low 50 Indexes is an excellent place to start to look for companies. The Bats Brexit High 50 comprises more UK-focused companies, whilst Bats Brexit Low 50 comprises of UK companies that operate on a more global scale.
Summary: A hard Brexit could potentially have major negative effect on UK stocks with large domestic UK exposure. Companies such as EasyJet, Barclays, British Land and Next could take a hit if a hard Brexit happens.