The vote to leave the European Union has left investors facing huge uncertainty. But one clear trend in all this confusion has been the strength of large-cap stocks with broad international exposure. Big, well financed companies that are cushioned from domestic economic gloom are precisely the types of equities that you might expect to do well in this environment. But not all large-caps are bulletproof, and general worries about possible dividend cuts mean that it’s worth treading carefully in the search for safety.
A shift in focus
A quick scan of Stockopedia’s 52 Week High Momentum screen (sorted by market cap) gives some clear signs about the types of shares that have pushed ahead in the wake of the EU vote. Consumer defensives, healthcare and utilities have generally done well. And given their strong flows of foreign earnings, mining and energy stocks have also jumped.
These sectors are home to some of the biggest companies listed in London, from Unilever and BP to Glaxo and Imperial Brands. They benefit from vast international exposure and may prove to be more profitable because of the weaker value of sterling.
This pattern is broadly repeated when you look at the 1-month relative price strength of shares across the FTSE 350. Those suffering most in the volatility have tended to be domestically-focused cyclicals, technology, construction and finance stocks.
To a degree this explains the strong rebound in the FTSE 100 since the EU referendum. Rather than signalling a bright outlook for the UK economy, it’s been boosted by a few defensive sectors - and companies with extensive foreign exposure - that have surged on the hope they’ll offer a safe haven in uncertain times.
Dividends under pressure?
Statistically, larger companies don’t offer the sort of explosive earnings growth prospects as smaller stocks. But many make up for it with the comfort of strong, sustainable dividends. One fly in the ointment however, is evidence that dividends are actually coming under pressure. One of the early warning signs is that dividend cover - a key measure of sustainability - is falling across the board.
Dividend cover measures how much of a company’s earnings are paid out in dividends. A ‘safe’ level of dividend cover is debatable, and larger companies do tend to pay…
