/ EU REFERENDUM /
FTSE 350 Financial Services (-0.92%)
30%
20%
10%
0%
-10%
-20%
Source: FE Analytics
Union would probably be hit by
Brexit. In addition, it would be
wrong to assume that leaving the
European Union would result in
less regulation on the City. The
British government has shown
more zeal for regulation than its
continental peers recently.”
“Overall, financial services have
more to lose immediately after a
European Union exit than most
other sectors of the economy.
Even in the best case scenario, in
which passporting rights were
preserved, the UK would still
lose influence over the single
market’s rules.”
Stephanie Flanders, chief
market strategist, UK and Europe,
for JP Morgan Asset Management,
says that in the event of a Brexit
vote, some financial services
firms may act early to shift their
operations on the assumption that
their competitors are likely to do
the same. This may see the sector
experience a lengthy state of flux.
Banks would take the biggest
hit, but other areas such as
asset managers may also prove
extremely vulnerable. Some of
this weakness is undoubtedly
already reflected in prices, which
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“Financial
services have
more to lose
immediately
after a European
Union exit than
most other
sectors of the
economy”
may limit the downside in the
event of Brexit. Equally, it would
leave the sector ripe for a strong
bounce if the UK votes to remain.
MANUFACTURING
In the event of a vote to leave,
the UK would lose the benefits
negotiated on its behalf by the EU
in more than 50 trade agreements.
In theory, this would allow the UK
to renegotiate these agreements
on its own terms, but this would
take time. While this is taking
place, the UK would be able to
COMMERCIAL PROPERTY
Commercial property companies
have already seen their share
prices hit both by concerns over
Brexit and the imposition of
higher stamp duty tariffs. David
Jane, joint head of multi-asset
investment at Miton, admits
that this is one sector he might
examine in the event of an “in”
vote on valuation grounds: “REITs
have sold off a lot,” he said.
The share price of British Land,
for example, has moved from
845p at the start of December,
dropping to a low of 644.5p in
February. It has recovered to some
extent, but is currently trading at
just over 700p.
HOUSEBUILDERS,
RETAIL AND LEISURE
These three sectors have been
at the vanguard of concern
over Brexit. Housebuilders, for
example, have been hit by worries
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STAPLES
Already expensive, there may be
some marginal benefit for the
large consumer goods, tobacco
and pharmaceutical companies
from sterling weakness following
a Brexit vote.
Monson adds: “Staples
(tobacco and beverages) and
pharmaceuticals should benefit
– at least in relative terms – from
weaker sterling, as well as from
their naturally defensive earnings
bases.”
In the longer term, however, the
issue would be whether industries
such as pharmaceuticals could
retain favourable access to
global markets outside the
EU. For these areas, along with
sectors such as aerospace, their
long-term prospects may also
depend on whether they can
maintain cost-effective supply
chains in the event of an exit.
The recent Treasury document
on Brexit suggests that reducing
trade barriers has been vitally
important in the development of
effective supply chains.
However, in the event of a vote
to remain, investors may start to
re-examine the high valuations
of these companies and their
share prices would start to look
vulnerable.
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SMALL/MID CAPS
Monson believes smaller
companies would be particularly
vulnerable to trade uncertainty
in the event of an exit vote, while
consumers may well lift their
precautionary savings, which
would affect the high street.
However, Tim Cockerill, head
of research at Rowan Dartington,
suggests there could be a bounce in
the event of a vote to stay in the EU:
“A number of the investment banks
have been shorting baskets of UK
domestic stocks – the FTSE 250 has
acted as a proxy for that in many
cases. As a result, if we stay in, those
shares could pop up quite nicely.”
PERFORMANCE OF FTSE 100 HOUSEBUILDERS
YEAR-TO-DATE
15% Taylor Wimpey (-2.04%)
10% Barratt Dev (-7.36%)
Persimmon (6.08%)
5%
0%
-5%
-10%
-15%
-20%
-25%
40%
FTSE 350 Consumer Services (-0.54%)
Peter Lowman, chief investment
officer at Investment Quorum,
concludes: “Clearly, as we enter
the month of June, the uncertain
outcome of the European
referendum will continue to gain
traction. While it is difficult to
make tactical changes to your
portfolio, given the closeness of
the current polls, investors need
to be mindful that come 24 June,
it may be necessary to alter their
investment course, but prior to
that date, it may be better not
to panic.”
“Indeed, it may be that bigger
global issues such as whether the
Federal Reserve will raise interest
rates over the summer months,
or whether the Chinese economy
suffers a hard landing, may have
a more damning effect on market
sentiment over the coming
months.”
Brexit is the market’s current
focus and will have a lasting
impact on a number of sectors,
but it may be that – whatever the
outcome – the market shifts its
attention a few months after the
vote. In many sectors, Brexit may
be only one of a number of factors
influencing the share price.
50%
FTSE 350 Oil & Gas (14.14%)
Brexit is the
market’s
current focus
and will have a
lasting impact
on a number of
sectors
60% FTSE 350 Consumer Goods (7.60%)
over the potential impact on the
domestic housing market, already
softening as international capital
has stayed away.
They may fall further in the
event of a vote to exit, but stand
to gain significantly if things
go the other way. Guy Monson,
chief investment of Sarasin &
Partners, says: “Worries over
housing market turmoil, falling
commercial investment and
regulatory uncertainty (would)
subside. Housebuilders and the
retail and leisure sectors would
stand as potential domestic
beneficiaries.”
FTSE 350 Mining (26.33%)
trade with markets around the
world based on the general rules
of the World Trade Organisation
(WTO), but this allows for
discrimination against foreign
services for prudential reasons.
Currency would be an
important consideration for the
UK’s exporters. Most analysts
expect a significant currency
devaluation should Britain
choose to leave, although
currencies are unpredictable
and a relief rally for sterling is
plausible in either eventuality.
Flanders says: “Manufacturers
should benefit at the margin
from the weaker currency. But
uncertainty about the post-Brexit
trading relationship will loom
large for them too and skills
shortages could be a negative
for some companies if inward
migration falls.” Although they
would not be in the front line,
there may be a longer-term hit for
manufacturers.
PERFORMANCE OF INDICES YEAR-TO-DATE
Source: FE Analytics
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