Brexit - What's happening to investments?


07/13/2016BrexitAs the dust begins to settle on a post Brexit UK, there are many more questions than answers when it comes to assessing its impact.

Is the UK likely to go into recession? How will Brexit effect monetary policy? What does it mean for the city of London? What will the impact of a weaker Pound be?

While many economic experts and companies warned on the consequences of leaving the EU, assessing whether it will be a short-term hiatus or have more far-reaching consequencies, clearly remains to be seen.

With new Prime Minister, Theresa May now in place, the road map for renegotiating EU terms is likely to have a direct bearing on the investment environment.

Here's a sample of some of the reaction and observations from different quarters over recent weeks. 

'Brexit vote would likely have a major impact on earnings' Suzuki, Japanese manufacturer. Source Financial Times 29th June 2016

'Recent sales volumes have been slow, the result of the referendum has increased uncertainties' Foxtons Estate Agents. Source Financial Times 27th June 2016

'easyJet is drawing up plans to move its headquarters to continental Europe following Britain's vote to leave the EU. Easyjet Source Financial Times 1st July 2016

'Consumer confidence has recorded one of its biggest falls in its history. The GfK research confirmed consumer confidence has fallen to minus nine, a drop not seen since December 1994.' BBC News 9th July 2016

UK recession

While growth figures for the UK for the 2nd Quarter 2016 will be available later this month, it's still too early to make any firm observations. However, there has already been some anecdotal evidence to show that investments and business activity is being influenced.

Property companies, house builders, banks and construction shares have already taken big falls. In the short term, these are likely to be the most volatile shares and could offer buying opportunities. Directors of Berkeley Group Plc, Galliford Try, MJ Gleeson and Taylor Wimpey all purchased shares following the extensive share price fall post Brexit result. At the current prices the house builders look cheap but patience may be rewarded if we enter a protracted period of poor UK growth figures.

To stave off a recession, Mark Carney, Governor of the Bank of England suggested interest rates are likely to fall in the near term which could be as soon as soon as August or September.

The hunt for income will continue for the foreseeable future. This should provide yet further support for strong business franchises with the ability to deliver consistent, high cash returns by way of dividend income. 

Sterling Weakness

Perhaps the starkest reaction to 'Brexit' has been the fall of the British Pound. Directly after the referendum result, Sterling fell to its lowest level for 30 years against the US Dollar.

Merger & Acquisition (M&A)
The collapse of the Pound over the last few weeks effectively means that UK companies have become significantly cheaper to overseas acquirers. This could lead to heightened M&A activity. Companies with stable, predictable cash-flow such as the utilities sector may become take-over targets. Indeed, if you look at the recent charts on potential bid targets such as United Utilities and Pennon, you may wonder if a bid had already been made (at the time of writing it hadn't).

Global Stocks
The majority of the FTSE 100 is made up of global stocks. Approximately 75% of the FTSE 100 company earnings are outside the UK. For these very large companies Brexit will have limited impact because sectors such as pharmaceuticals and commodities have mainly US Dollar earnings. The fact that they are priced in British Pounds may explain why they have risen so much in the last few weeks as the share prices adjusted for exchange rate movement.

Exporters
Exporters will gain from the weakness of the Pound. Companies with large net exports, particularly those that trade in US dollars, should benefit as their goods and services become cheaper. This is certainly one of the main benefits to the UK economy from 'Brexit' but it remains to be seen how well the country can capitalise on them.

Inflation
With a protracted period of weakness for the Pound, inflation could become a factor as imported goods cost more in real terms. Companies which predominanlty import goods from overseas to sell into the UK could be dispraportionally affected by inflation.

Steve Ross, Investment Advisor at James Sharp, explained.

"Following Brexit, there are many uncertainties which will likely lead to a period of protracted market volatility.

"Resilient companies that are able to cope with change and manage uncertainties are likely to continue to thrive over the long-term regardless of EU membership or not.

"Should the market offer to sell a quality business at a 'cheap' price, then there will be investment opportunities."