In the almost three months since the referendum in which the UK voted to leave the European Union, there has been a steady stream of economic data – some good and some bad.
Although it’s still early days, we can already glean an idea as to who some of the “winners and losers” could be during and after the process of delivering Brexit. One of the best forward looking indicators we have is stock markets, with hawk eyed traders interpreting the post-Brexit economic data and forming an outlook on what companies that are traded on the stock exchanges they buy and sell.
The UK’s main stock market index, the FTSE 100, is up approximately 13% since its post-Brexit trough, but the performance has varied significantly across sectors and individual companies. Although it’s still unclear how some of these sectors will be affected based on what kind of ‘Brexit’ is delivered – chiefly whether or not Britain stays in the single market or not- we can get an idea of what the future may hold for some industries based on these initial reactions in the aftermath of the vote.
Perhaps not surprisingly, some of the biggest beneficiaries so far have been in sectors commonly referred to as ‘defensive’ industries, due to their tendency to perform well regardless of any economic uncertainty. This has seen a boom in the price of a number of tobacco stocks as well as utility companies.
It isn’t just these more ‘defensive’ companies that have benefited in the immediate aftermath of the Brexit vote though. Companies that book a large amount of their trade overseas and consequently collect most of their revenues in another currency, have also been doing well. Diageo, Unilever and Burberry are examples of companies that sell a significant proportion of their goods in Asia or North America and, as such, can expect to see a bounce in their revenues once it is reported in pounds sterling as a result of the pound’s decline against other global currencies. Pharmaceutical companies such as GlaxoSmithKline have also seen a bump in their share price, owing to a large portion of their products being sold in North America.
There is, however, another component worth keeping in mind that explains the reason for their rise. Given that their businesses are based on the trade of goods, rather than services, the threshold for what they would require from a Post-Brexit settlement with the EU is lower. To put it simply, a settlement that granted them tariff-free trade with Europe would most probably be sufficient for such businesses rather than requiring full membership of the single market. They also stand to gain if the UK enjoys success in negotiating trade deals with countries outside of the EU.
That said, there have been some ‘losers’ in the early stages. Banks and insurers have been some of the worst hit, having been affected by a double whammy of interest rates being slashed further (which affects their margins) and the potential impact of being shut out of the single market.
Even in the banking sector, however, there have been winners and losers. The likes of Barclays and Lloyds have been hit, but for different reasons. Barclays still has significant ‘non-core’ international operations in Europe which are vulnerable throughout negotiations, whilst Lloyds derives two thirds of its income from mortgages and is therefore very reliant on the UK economy remaining in good health. On the other hand, Standard Chartered earns a large chunk of its revenue in the Far East and has actually seen its share price rise since Brexit.
Airlines such as EasyJet have also endured a turbulent patch, partly due to the price of most of their expenditure on fuel is priced in dollars but their revenue is mostly in pounds. They are also left to hope that a Brexit deal is struck that sees them able to maintain access to the European Common Aviation Area rather than the UK having the strike a series of bilateral agreements in order for them to fly to destinations across the continent. Given what is at stake for both the EU and the UK in terms of tourism volumes in both directions though, it would be surprising if this turned out to be a significant stumbling block but they will remain vulnerable until this is finalised.
Property – both commercial and residential – is another sector where uncertainty has been detrimental to the share price of some of the big companies in the property industry. This is largely based on the assumption that the EU may attempt to prise away some of the UK’s financial services, in turn reducing demand for UK office space. On the residential side of the property market, a government with control over its immigration policy is likely to reduce the number of migrants allowed to enter the UK, which may reduce demand for property.
It’s worth bearing all this in mind over the coming years. Although we do not know the finer points of Brexit just yet, it is safe to say there will be plenty of ups and downs for financial markets and the companies that underpin them in accordance with the news flow. We should be conscious of how some of these stocks have reacted in the early stages, and be prepared for some of the companies in the sectors mentioned that have more at stake to be in for a bumpy ride. On the other hand, there are companies with something to gain from a potential decline in sterling and new opportunities abroad. Clearly the eventual winners and losers will very much depend on the value of the pound, as well as the Brexit deals that emerge.