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Brexit’s one month anniversary

It’s been a month since Britain’s historic vote to leave the European Union. The defining market move following the Brexit vote has been the decline in Sterling. The fear was that Britain leaving the European Union would hit economic growth and prompt the Bank of England to cut interest rates.

The slump in the pound is naturally creating a new set of winners and losers in British industry but perhaps more unexpectedly, the beginnings of a boom in mergers and acquisitions. One of the fears leading into the referendum was that foreign investment into the UK would dry up if it left the EU. The deals coming so quickly after Brexit shows there is still international confidence in British business.

Since the vote was announced, South African retailer Steinhoff has bought Poundland and ARM Holdings has been acquired by Japan’s Softbank. The timing of the deals makes sense in the context of the slide in Sterling versus the South African rand and the Japanese yen (see above chart). Other deals could easily be in the pipeline. Companies previously thought to be targets including ITV, Diageo and even BP now have an added takeover premium after Sterling’s drop.

The drop in the pound is naturally a positive for companies who make a large share of their earnings abroad. Companies, including Burberry and Primark have already guided earnings expectations higher based on the fall in Sterling. International companies with a large presence in the UK who post earnings in foreign earnings are the most exposed to Brexit from a currency perspective.

British travel and leisure shares have the double whammy of Brexit and a rise in terrorist attacks. A lower Sterling which puts less foreign money in their pockets could detract Brits heading abroad, especially to Europe, Turkey and North Africa which have suffered a number of terrorist attacks.

Easyjet CEO Carolyn McCall said the drop in Sterling cost her company £40m. Rival Wizz Air said it was halving intended growth plans in the UK because of the weaker British pound and diverting it to other routes. IAG is a bit more insulated from Brexit since the lower pound should also generate more tourists coming to Britain on British Airways and Iberia flights.

The crash in homebuilder shares in the aftermath of the referendum vote was so severe that there has been a natural bounce back in the weeks following. Trading updates from the big homebuilders have shown strong earnings growth but the outlook for homebuilders is clearly foggier in the wake of the Brexit vote. Shares of Barratt Developments were amongst the biggest fallers on the FTSE 100 when it warned it would be “reassessing land approvals” following the EU referendum.

Brexit appears to have exacerbated fears that have been brewing for a while over the state of the UK property market. There’s still a shortage of housing and borrowing rates are still very low but a slowdown in demand for London’s top-end properties after tax hikes is a downward drag on prices across the market. Brexit and its impact on immigration could exacerbate problems finding skilled labour.

Brexit has been particularly hard on bank stocks. There are specific issues that face the banking sector as a result of Brexit, including so-called “passporting rights”, but the bigger threat is that of an economic downturn. Some of Europe’s banks still have startlingly high levels of non-performing loans sitting on the books, which would increase if there were another downturn.

There is also the issue of central bank intervention. Banking net-interest margins are at the lower bound. The Bank of England held rates steady at its meeting in July but has left the door open to a cut in August. If the BoE does join the European Central Bank and Bank of Japan with another round of monetary easing, that will just leave the US Federal Reserve as the last vestige of hope to create a more favourable environment for banks.

One month on from Brexit, the FTSE 100 is at its highest in nearly a year and the FTSE 250 has nearly unwound its Brexit losses. A rise in mergers and acquisitions, added political certainty from Theresa May as new Prime Minister, the prospect of central bank stimulus and positive international sentiment are all reasons to think that UK markets can continue to prosper after Brexit.


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