5 Weeks Remain

Just over a month remains before the UK’s EU referendum. With uncertainty appearing to wane despite polls suggesting it’s still as close as ever, we take another look at how markets are holding up amid all this, and how you can either take advantage of the opportunities, hedge against the risks or both!

The Pound

Perhaps the most impacted object in all this. Sterling remains under fire with the Bank of England not helping matters by overstepping the fine line that separates Central Bank independence from Politics. Governor Mark Carney has said a recession is on the cards in the event of a ‘Brexit’ which would no doubt be accompanied by a further plunge in the Pound – perhaps another 20% according to the NIESR, which would make things like business, travel and a host of others more expensive for UK citizens. With such an outlook arguably self-fulfilling, will the message nonetheless be enough to secure a landslide ‘stay’ vote and robust relief rally?

What Economic Data Can Tell You

The data suggests uncertainty may be hindering business in the run up to the referendum by way of delays in major business decisions. An exit would bring added uncertainty, which business doesn’t like. Yet even a stay vote will not herald an immediate return to how things were 6 months ago – granted, even if they did, that wouldn’t be great considering how things were 6 months ago!

What of the UK 100 index?

While the UK 100 is arguably more sensitive to moves in the US Dollar than it is to those in the Pound, that doesn’t negate the fact that it is exposed to the Brexit debate. Financials and retail stocks are already feeling the pinch and stand to feel it even more if the UK does vote to leave the EU, via reduced access to European markets and increased costs (in the case of clothing and electrical goods retailers) of imported goods stemming from a weaker currency. The wider market too is highly exposed with the traditionally being a much more UK-focused index.

House builders comprise one specific sector that’s been very quick to move around, tracking the swings in sentiment as investors weigh up the internationally driven London market with that covering the rest of the UK.

Travel stocks are sure to be bruised with Ryanair’s O’Leary, formerly a staunch Eurosceptic, now warning of higher prices if we do vote to leave the EU.

Financials are of course in the spotlight given their mixed exposure to the UK, Europe and further afield. We address 2 stocks from each sector below.

Int. Consolidated Airlines (IAG) / Travel

In the event of a UK exit from the EU, UK passenger numbers – for both business and pleasure - may well track Sterling lower. But the conglomerate that owns British Airways and Ireland’s Aer Lingus is largely insulated from this due to its international standing. Recent share price weakness on a surging oil price has seen shares retreat to technical 16-month rising support, a bounce off which would ratify the opinions of all the brokers who cover IAG, with no ‘sell’ ratings currently issued on the stock.

IAG, 4-year chart (Source: IT Finance)

Consensus Roundup

Bullish: Goodbody, Buy, Target 1235p, +138% (25 Apr)

Consensus: Target 742p, +43% (17 May)

Bearish: Cantor Fitzgerald, Hold, Target 520p, +0.4% (29 April)

Ryanair (RYA) / Travel

That O’Leary himself has now decided he’s for the UK remaining within the EU is significant for Ryanair – an Irish company with a European customer base whose main business hub is London’s Stanstead airport. Being a low-cost airline, that’s exactly what Ryanair would like to remain and customers are fickle enough to abandon it if fares rise – after all, if you’re going to be treated like cattle the last thing you’ll want to do is pay for the privilege!

RYA, 4-year chart (Source: IT Finance)

Consensus Roundup

Bullish: Goodbody, Buy, Target €21, +61% (11 May)

Consensus: Target €17, +28% (17 May)

Bearish: Macquarie, Underperform, Target €10, -22% (7 May)

Lloyds Banking Group (LLOY) / Financials

The fact the LLOY is a 100% UK bank could be seen as a positive – it’s not about to up sticks and move to Paris. It does, however, hold the largest mortgage book of all the UK lenders which is the sort of thing likely to set alarm bells ringing in the event of a Brexit. In that instance, the outlook for house prices will be making anyone in the mortgage game a little nervous. With all this potentially weighing on sentiment towards LLOY, it’s a stock worth watching for its rebound potential in the event of a ‘stay’ vote.

LLOY, 4-year chart (Source: IT Finance)

Consensus Roundup

Bullish: Jefferies, Buy, Target 108p, +60% (11 May)

Consensus: Target 82p, +22% (17 May)

Bearish: Bernstein, Underperform, Target 55p, -18% (4 May)

Standard Chartered (STAN) / Financials

Shares in the emerging markets focused bank have been highly depressed in 2016 for obvious reasons – deep concerns about Chinese growth. However, a mildly positive Q1 results season for banks has seen Standard Chartered stage what could be the beginnings of a recovery. Shares are still trading at a lower price than they were immediately following the financial crash of 2008 – when the economic cogs of the world almost ground to a halt. In situations like this, we find ourselves asking whether or not things really are worse today than they got back then…

STAN, 7-year chart (Source: IT Finance)

Consensus Roundup

Bullish: JP Morgan, Overweight, Target 750p, +47% (12 May)

Consensus: Target 524p, +3% (17 May)

Bearish: Jefferies, Underperform, Target 381p, -25% (23 Feb)

Barratt Developments (BDEV) / House Builders

A company with fundamentals as strong as BDEV’s just has to be on your watch list right now. With house builders seen as potential victims of a ‘leave’ vote, shares have suffered. Yet it’s almost surprising that no one has stopped to look at the individual companies. If they did, they’d find a strong balance sheet and positive outlook in Barratt Developments while noting also that not one broker covering its stock is using the word ‘Sell’ in their analysis. With the likelihood of a ‘stay’ vote increasing almost daily, again we see potential for a strong rebound and resumption of the longer term trend.

BDEV, 17-month chart (Source: IT Finance)

Consensus Roundup

Bullish: Barclays, Overweight, Target 848p, +54% (2 March)

Consensus: Target 651p, +18% (17 May)

Bearish: Liberum, Hold, Target 514p, -6% (23 Feb)

Berkeley Group (BKG) / House Builders

The London-focused new home builder markets its properties abroad as financial assets and they sell at a large premium to the wider London residential market. The reason foreigners like to invest in London property is that they see London as a gateway to Europe. If that were to cease, it’s seen as a possibility that foreign investment might go down. Berkeley group would then presumably be more at the mercy of the domestic market which would certainly not be champing at the bit to pay the sorts of prices currently way over the odds for a studio flat! Brexit therefore has the potential to lower the average price of London residential property and thus Berkeley’s profits.

BKG, 17-month chart (Source: IT Finance)

Consensus Roundup

Bullish: Jefferies, Buy, Target 4650p, +52% (2 March)

Consensus: Target 3839p, +25% (17 May)

Bearish: Credit Suisse, Underperform, Target 2372p, -23% (23 Feb)

What are the options given all the above?

Given the EU referendum has the potential to affect us all, we must all take a view on it. Whatever your view, the issue has potential to affect your finances and your future.

1. Trade the uncertainty

There’s no doubt that the UK 100 has been in a trader’s market since the beginning of March, with the range between 6060 and 6220 dominating and a plethora of both long and short opportunities for index traders. This is sure to continue right up until the 23 June vote and beyond.

1. Hedge your existing positions

With us, you have the ability to profit from falling as well as rising prices – so if you think markets are going to go down between now and 23 June, then why not open some short positions? An Accendo trading account provides you with a convenient tool to do this, but which is also useful for hedging against short term market volatility.

To find out more about Accendo Markets and what sets us apart from all the other execution only brokers out there, visit our information page here.

   3) Keep Calm and Carry On!

Hold on, convinced there’ll be a ‘stay’ vote. With a 70% chance of such a result now being touted by the bookies, could it be time to buy travel stocks, financials and house builders? All potentially stand to benefit if we stay, while a select few might survive if we go. The stocks discussed above represent the tip of the iceberg when it comes to the opportunities available in the run up to 23 June. To be kept up to date with all the Brexit news and events and to find out which other stocks could be set for attractive share price moves, access more of our research here.

You can also find regular commentary and analysis on the Accendo Markets Blog.

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