Market Outlook

Which FTSE 100 stocks will prove Brexit-proof?

Last week the bosses of FTSE 100 stocks and their investors watched on with eager anticipation as Prime Minister Boris Johnson locked horns with Germany’s Chancellor Merkel and France’s President Macron in his quest to renegotiate the Withdrawal Agreement before the Brexit deadline of October 31.
 
At home MPs either allied to the May deal or opposed to Brexit entirely also ramped up their plans including a potential caretaker government under Labour leader Jeremy Corbyn.
 
Despite the intense political drama, Johnson’s meetings, which partly left open a potential amendment to the stumbling block of the Irish backstop, did little to boost the ailing FTSE 100, which closed the week down 1.3%. 
 

-1.3%

The FTSE 100's decline last week

The pound made greater strides ending the week as the best-performing major currency, hitting three-week highs against the Euro and US Dollar.
 
This came only a fortnight or so after Johnson’s declarations that he would take the UK out of the EU with a hard no-deal Brexit, which had sent the value of sterling plunging against the dollar to a two-year low.
 
This correlation shows the unique global nature of the FTSE 100 – with over two-thirds of its earnings coming from outside the UK – and why picking Brexit winners and losers from the index is not so straightforward.
 
 
FTSE gains
 
It may come as a surprise to some that the FTSE 100 index has climbed from 6,338 points on June 23 2016, the day of the referendum vote, to 7,092 today.
 
Stocks such as Antofagasta [ANTO] – up from 469p to 809p in the same period - as well as British American Tobacco [BATS], HSBC [HSBA] and Shell [RDSA], have all benefited from their global reach, as well as the weak pound as they report their earnings in dollars. 
 
These firms also pay their dividends in dollars boosting earnings per share and investors’ portfolios. If there is a no-deal, as widely expected, the pound will likely slide dramatically and those reporting in overseas earnings stand to benefit – provided the market does not crash.
 
If good news on a potential deal does emerge however, the pound will likely strengthen, boosting stocks which report in sterling, as well as providing a potential boost to the FTSE as a whole as prolonged uncertainty finally draws to a close.
 
 
 
Who else will be smiling?
 
Banking stocks generally are experiencing Brexit fueled volatility, with Lloyds – down from 54p in July 2016 to around 50p today - especially in the firing line if the UK economy (to which it’s particularly exposed) tanks post-Brexit. HSBC and Barclays are more globally diversified and will likely prove more resilient as a result.
 
If there is a deal then expect banking stocks to surge as uncertainty lifts, economic forecasts improve, interest rates begin to climb and businesses, house buyers and consumers regain confidence. 
 
This would also lift the stresses on big grocers such as Tesco [TSCO] and Sainsbury’s [SBRY], which, hampered by faltering sales, a threat to supply chains, and the need to stockpile ahead of a potential no-deal, have stuttered in 2019. Sainsbury’s is down 25% this year, while Tesco shares, after climbing in the first quarter, have declined 15% since the end of April.
 

-15%

Tesco's share price decline since 30 April

Retail stocks such as Sports Direct [SPD] and Halfords [HFD] would also be boosted by a deal but, again would be further exposed to a potential economic slowdown in the event of a no-deal.

 

Still strong

Some stocks have remained relatively unaffected by Brexit chaos, particularly pharmaceuticals such as AstraZeneca [AZN] – up from 4484p on June 1 2016, to 7240p on 27 Aug. The firm has been boosted by its overseas earnings, as well as continued global demand for new breakthrough cancer and heart drugs. Analysts expect its resilience to continue, deal or no-deal, in the months ahead.
 
Joints and artificial limbs group Smith & Nephew [SN] are also set to continue to make strides no matter how Brexit develops given demand for its products in emerging markets and China. 
 
 
Another stock expected to keep shining is National Grid as the UK ‘must keep the lights on’, Brexit or not. Mobile phone firm Vodafone [VOD] should also prove resilient against any disruption, due to its global business units and demand for, and investment in, new services such as 5G. 
 
Finally, housebuilders could be worth a bet despite being exposed to the UK economy and stuttering consumer confidence. They tumbled after the referendum vote, but their shares prices have since recovered. Government schemes such as Help to Buy, as well as large land banks and rising housing prices, have boosted the firms’ outlooks as strong employment numbers translate into solid buyer demand. 
 
It is also a sector which may not be just Brexit-proof, but potentially fortified against a change in government, given Labour’s commitment to improve housing supply.

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