Brexit Plays

29th Nov '20 by gari en desti

3 comments 358 reads

With a deal or no deal Brexit approaching, I’m quite surprised not to have seen the Stockapedia community discussing this in relation to companies that might be impacted.

It might be a little late to open this discussion now, with only days to go, but maybe it’s not too late, as we don’t know which way it will go yet.

So, it might be good on the day of the announcement, to have some plays either way that we can jump into if one wished to do so.

So can I ask if anyone has any no deal and/or Brexit deal plays that they would be willing to share?

thanks

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About the Author

Gari En Desti

Premium Member

3 comments

Macro

29th Nov '20

First of all any 'event' is likely to be announced on a Sunday evening when the markets are closed. I dont expect this to be like the vaccine announcements that took place on Monday's prior to the USA open, but during the European market day and after the Asian market close.

Secondly, my experience is that all of the large trade blocks make beggars of their neighbours. They must deliver benefits to their members - and that almost always comes at the expense of those neighbours closest to them to trade with, but who are not yet members.

In terms of UK engagement or disengagement with Europe my view is that this comes down to a terrible choice.

- Path 'A' is to engage in some form of relationship in order to limit economic damage - but then be constantly driven to respond to their changing internal policy and bullying in never ending re-negotiations.

- Path 'B' is to cut yourself off from the endless re-negotiations and bullying through adopting WTO terms - and suffer the initial economic 'shock' that that brings.

For those UK resisdents with international holdings - or indeed UK stocks with significant overseas earnings - how the currency markets respond will be very important. With GBP/USD now at 1.33 a rise to 1.45 would be 9% rise. A fall to 1.20 would be 10% fall. Which way will the currency markets decide? Operational gearing means UK stocks with significant overseas earnings will amplify the currency movement. And of course ETFs / ITs with overseas holdings should simply see a linear movement with the currency moves.

My own view is that any currency fall in GBP following either no-deal or a very skinny deal will not really boost UK exporters - as the additional trade frictions will retard export. Any rise in the GBP following a deal or a 'fatter' deal' will further hamper UK exporters - and this may not be offset by rising demand for UK produce in European markets suffering from a general lack of demand. The UK national preferences have been to protect UK services by closing that market to European competitors. Conversely, the UK negotiating prefernece has been to include exporters in the deal to protect them in as much as it is possible to do from the initial shock.

My conclusion would be to be relatively balanced in terms of currency exposure and associated earnings; and for UK stocks domestic UK services would seem to be the less volatile choice.

But, I suppose not everyone wants to take the less risky path .... whcih is why we are in this situation in the first place?

scrooge

29th Nov '20

Currency will be the main issue.

Even before the pandemic, UK manufacturing employment was down to 7.5% of total and falling. I imagine it must be lower still by now. The service and knowledge sectors are little impacted. While the queues of lorries make good press photos, the wires and airwaves transmitting software, entertainment and all else, continue to hum ever more busily.

Given the media comments on Brexit, I assume with no-deal sterling will be weaker and thus stocks like £VLX (I hold, and have just been reading the Investment Club write up!), Rio Tinto (LON:RIO) , Experian (LON:EXPN) and so many companies quoted in London with large overseas exposure could stand to benefit. But currency gyrations are so difficult to predict and to time that I would not stock pick on those grounds. Overseas business is just one element of diversification that potentially improves the investment case.

gari en desti

29th Nov '20

Hi Marco and Scrooge. Thanks both for your thoughts. Totally agree that GBP will get hit if a no deal and benefit if a deal is done. That's a no brainer. I'm sitting on USD with a hope of seeing $1.20. I also think you are correct that UK stocks with currency exposure could be volatile. I also think that international haulage firms might get a boost if a deal is done, but no idea what will happen to them if no deal. Maybe customs clearance companies might be an interestign area to check out too.

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Brexit Plays

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About the Author

Gari En Desti

3 comments

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