How do I invest if I think there will be a "good" Brexit?
Opinions on what constitutes a "good" Brexit vary. For the purposes of this week's CIO Question Time let's assume that it means the UK retains access to European markets and that financial services can continue to be sold into the European market.
Firstly, we would expect the pound to rally reversing much of the loss that followed the Brexit vote. All else being equal, this would be bad for overseas investment and UK listed companies with global earnings. The London property market, both residential and commercial, would hold up as companies cancel their plans to relocate to Europe. This would support house builders and property companies, particularly those with exposure in the South East of England.
While a stronger pound could have a deflationary effect in the short term, the more positive domestic economic outlook would probably bring forward rate rises from the Bank of England. This would be broadly positive for domestic banks such as Lloyds. However banks like HSBC, who have a majority of operations outside of the UK, would suffer more from the devaluation of overseas earnings than the positive impact on UK operations.
The other sector that could do well from a pick up in the domestic economy would be brewers such as Marstons and Greene King. As we can see from the banks, it is not necessarily a sector selection but more a case of looking at individual stocks.
What investments would do well in a "bad" Brexit?
Here we have to consider the reverse of the above scenario and concentrate on companies with overseas earnings. About 75% of earnings for companies in the FTSE 100 come from overseas, so the index as a whole may benefit from a fall in the pound.
Broadly speaking, overseas equities would rise in sterling terms but some European companies may suffer from a reduction in trade with the UK. As noted above, HSBC with its far Eastern operation would outperform other banks. Many energy and resource stocks such as BP and Rio Tinto would benefit from the currency move as not only are many of their operations based overseas but they do business in dollars. Other companies with global operations such as Glaxo would also benefit.
The exact outcome will depend on the final Brexit terms which are still unclear. In the meantime, other stock specific issues may move prices more than the swing in expectations for Brexit do. A more diversified approach would be recommended at this time rather than betting on a particular outcome.
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