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Home / Special Reports / The Brexit Report: Stocks to buy and ones to avoid prior to the June referendum

This report is not a personal recommendation and does not take into account your personal circumstances or appetite for risk.

15 March 2016

The Brexit Report: Stocks to buy and ones to avoid prior to the June referendum

Synthetic Emotion

Whether the UK votes to leave the EU or remain within it, the world is highly unlikely to end. But the vote will almost certainly be very close with the ultimate outcome impossible to predict. For that reason, markets will move!

If there’s one word that sums up the Brexit chatter that’s currently pervading the mainstream media, it’s emotion. We all know that emotions – in particular fear and greed – are what drive a good portion of the financial markets, if not all of them.

This report aims to break through this wall of emotion and bring you as close to the facts as we can. We’ll then look at some examples of UK stocks that could provide attractive opportunities to investors as well as some examples of those that might be best left alone or even sold short.

Hopefully, once you’ve read this report in which words like ‘immigration’ and ‘security’ will be conspicuous by their absence from here on, you’ll be in control of your emotions so that you can capitalise efficiently on the opportunities presented by those who aren’t!

 

Where will the action be?

This is the reason we’re getting this out to you now. It’s natural to assume that the markets will react to the outcome of the in/out referendum, but we don’t believe that’ll happen. Research and consensus seems to indicate that:

  1. Market action is likely to be pre-emptive in nature, not reactive
  2. The Pound Sterling will weaken
  3. We shouldn’t worry. Whether or not the UK leaves the EU, we will all still be here after the referendum.

 

So what’s special about these 3 key points?

There’s already a lot of fear in the financial markets, as is always the case when some form of uncertainty creeps in. While a lot of the uncertainty to do with China and commodities has been priced in leading to strong rallies in metals, mining stocks and other EM-exposed shares, a new wave of Brexit uncertainty is washing over the markets. Markets don’t like uncertainty, and they sure as hell don’t like change. Therefore a Brexit is likely to be seen as a negative thing.

The more fearful the markets become that the UK will leave the EU, the more ammunition that will give to pro-Europeans who will use that fear to reinforce their (already fear-laden) arguments. The ensuing snowball effect is already underway and will not only see big moves in equity markets and FX. It will also likely see the British public eventually vote to remain in the EU. These are observations arrived at through reason, not emotion.

The fact that market action will be pre-emptive and driven by emotion means that there are opportunities in the market right now that will not be there on 23 June.

It’s at times like this that opportunities spring up. The smart money always starts buying when everyone else starts panicking. It sells when everyone else is gripped by mania. The smart money gets damn good deals that way.

Page: 01

Will the UK collapse if Brexit happens?

Let’s play contrarian. The most prominent assumption is that Brexit will be negative and remaining in the EU will be positive. That assumption isn’t necessarily wrong but it’s not necessarily right either.

Let’s assume that it happens. A UK exit will probably put off international investors who see the UK as a manufacturing base for the wider Europe. In particular, car manufacturers which are now producing cars in record numbers in the UK.

But the fact that the Pound will weaken in the run-up to the June referendum has implications for UK-based companies that export goods to the rest of the world.

trade                  Source: ONS, 10 Mar

The above chart shows the historical balance of trade for the UK, broken down into EU and non-EU imports & exports. Note the increase in exports to non-EU and increase in imports from EU countries since 2001. Given that the UK will have to re-negotiate its trade relationships with EU countries after a Brexit, it will become much easier for the UK’s exporters to re-focus their efforts onto non-EU countries with which the UK already has solid trade agreements.

This would no doubt include high-growth emerging markets at the expense of a stagnant European Union, which is ultimately good for those businesses.

Risk off in the run up?

In reality, the UK 100 has limited exposure to the Euro and Europe. It does, however, react strongly to wider market sentiment. That’s why 200 UK business leaders, including many UK 100 bosses, signed a letter in late February pleading with the British public to vote to stay in the EU. Does this mean those people think their companies will suffer in the event of a Brexit? Could it also mean that shares in those companies may move south as anticipation, uncertainty and fear builds in the run-up to June? An account that allows you to easily short sell could be a godsend if that happens.

Page: 02

What’s the worst that can happen?

While we anticipate a scenario whereby a few well known UK 100 blue chip stocks may head south in the run-up to the EU referendum, driven by emotion, then rally strongly (and emotionally) back towards current levels when the UK eventually votes to remain, there’s always the chance that these stocks may already have made the down move, meaning now could be the time to buy.

Whatever the case, the tendency for prices to move up and down within a longer term trend makes for plenty of trading opportunities. What’s more, you can be sure that things will change on a daily basis between now and 23 June with the market reacting in kind. That’s why it’s so important you’re working with a broker that can dedicate the time and energy you need to keep abreast of all the Brexit-related market action. What’s more, with an Accendo trading account you are able to speculate on falling prices just as easily as rising prices. This is an invaluable tool that effectively doubles your range of opportunities in the markets.

We’ve seen an in/out referendum before

 UK 100  Cash (-)

The UK 100 shed nearly 400pts from its high point in May ’14 before rallying back into the Scottish referendum, which took place on 18 Sept. Related stocks such as Royal Bank of Scotland (RBS), Aberdeen Asset Management (ADN), BAE Systems (BA), Babcock International (BAB) and Lloyds Banking (LLOY) all moved significantly in the run-up.

We see several sectors that could be significantly affected by Brexit and all the excitement it’s generating currently. Our stocks to watch into the referendum include many stalwarts of UK industry such as British Land (BLND), Unilever (ULVR), Rolls Royce (RR) and Vodafone (VOD). Each has the potential to move significantly due to its exposure to Europe and, indeed, the rest of the world. These companies could also provide great trading opportunities based merely on what their CEOs say - after all, why did they write a letter to the UK public urging it to vote ‘stay’?

 

To see which are likely to benefit, suffer read on.

Page: 03

Set to Benefit?

British Land (BLND) / Commercial Property

British Land Co PLC (-)

British Land Co. is one of the biggest listed commercial property companies in Europe. The buoyant London market is key for BLND and its peers, but the extent to which it relies on foreign (both EU and non-EU) investment is evident in the fact that shares in BLND have collapsed some 23% since in/out squabbling among the UK’s politicians began last year.

With shares now around levels last seen in September 2014, is the company now fully valued for a UK that’s no longer part of the EU? If so, then when a ‘stay’ vote – the more likely outcome – is cast, we could see the price rally strongly to regain mid-2015 levels. Time to buy?

Broker Consensus

BLND

Page: 04

Primed for a decline?

Rolls Royce (RR.) / Industrials

Rolls-Royce Holdings PLC (-)

Rolls Royce Holdings is perhaps best known as a manufacturer of aircraft engines. The recent price weakness may be attributed to a terrible H2 in 2015 when some bad results and a few profit warnings saw shares crash to historic lows. Importantly, while RR would certainly face increased risks from a UK exit due to its work in defence and aviation, it’s difficult to ascertain just how much has been priced in already. Technical indicators say not a lot, pointing to further downside in the near term, while the company’s fundamentals are also weak. RR has got problems. Time to Sell or go short?

Broker Consensus

RR

Page: 05

Leave well alone?

Vodafone (VOD) / Telecommunications

Vodafone Group PLC (-)

Vodafone is one of the leading global telecommunications companies, with a significant presence in Europe (as Vodafone) and the rest of the world via its subsidiaries, joint ventures and investments. Since Vodafone is directly exposed to the EU, we see resultant pressure on the share price. However, the shadow of M&A is never far from the company with Liberty Global having talked about making a bid in 2015. That saw a 13% jump in VOD’s share price. As with RR, technical indicators are on the bearish side of neutral and VOD does have a significant European presence, but the company has solid fundamentals that make it potentially ripe for acquisition. Whether or not Brexit will keep a potential predator on the sidelines, should investors avoid VOD for now?

 

Broker Consensus

VOD

Page: 06

Hold at arm’s length?

Unilever (ULVR) / FMCG

Unilever PLC (-)

Unilever is a multinational player and a classic defensive play, deriving 27% of its revenue and 27% of operating profit from within Europe. Times of uncertainty often see investors buy into consumer staples because demand in that sector is seen to remain constant, that is to say it’s not likely to go up much or down much over time. We’re headed towards an EU referendum, not Armageddon, and so this is likely to remain the case as we approach 23 June. ULVR could well garner more interest from investors as a safe haven as the Brexit fears intensify, yet there are bound to be those worried about the amount of exposure the company has to Europe. With balanced forces, shares often trade in very tight ranges. Is ULVR one of those stocks that should simply be held onto for now?

 

Broker Consensus

ULVR

Page: 07

On the right side of either vote?

 Johnson Matthey (JMAT) / Chemicals

Johnson Matthey PLC (-)

Johnson Matthey is a fairly diverse chemicals company that refines precious metals as well as manufacturing catalytic converters for cars. Given that precious metals, cars and chemicals sat within the top 15 UK exports during 2015 (source:worldstopexports.com), JMAT stands out not only as an exporter that could benefit from a weaker Pound in the run up to  June but also as one that may suffer if UK car production falls dramatically in the event of Brexit. Note though that last time JMAT shares were at these levels, Platinum and Palladium in particular were much more expensive, UK car production was lower and the world was in less uncertain times to the detriment of Gold. Time to buy?


Broker Consensus

JMAT

Page: 08

Share sale to be rushed through?

Lloyds Banking Group (LLOY) / Banks
Lloyds Banking Group PLC (-)

Lloyds Banking Group consistently garners interest from investors on account of it being among the ‘cleanest’ and most familiar of the UK banks. Don’t be fooled by France’s economy minister ‘rolling out the red carpet’ to the banks if we vote to leave. This is as unlikely to happen as a UK exit. The City of London works just fine as a global financial markets hub and there’s no reason to expect that to change. In which case, should LLOY shares continue to recover we could see George Osborne move to get the share sale out of the way ahead of the referendum (an emotional decision?). If shares fall again on increased uncertainty (and the fact that banks are generally out of favour at the moment), buying at a lower price gets the investor a better deal than buying in at breakeven or above with a 5% discount.

 

Broker Consensus

LLOY

Page: 09

Keep an eye on it!

London Stock Exchange (LSE) / Financial Services

London Stock Exchange Group PLC (-)

The UK has been the European hub for trading OTC (over the counter) currency derivatives since records began about 20 years ago. The City is home to the biggest inter-dealer brokers, clearing houses and law firms that make up the industry. While a Brexit would have no benefits for this market, it’s safe to assume that it would mean something. So, how bad would it be? London Stock Exchange is a majority shareholder in LCH Clearnet, the world’s largest clearing house, which only recently escaped an ECB move to ban some of its activities if it remained headquartered in London (source: Bloomberg). There are now indications that EU authorities would revisit this if Britain leaves. However, LSE’s tie up with Deutsche Bourse might just make life a bit easier – if it goes through. One to watch.

 

Broker Consensus

LSE

NB All pricing and consensus data from Bloomberg on 14 March; full rundown available on request

Page: 10

How can you take advantage of these potentially attractive share price moves?

Whether you see UK stocks going up or down in the run up to the EU referendum or indeed afterwards, tradable opportunities will present themselves regularly. We’re here to help you weed them out and capitalise on them. Accendo Markets can help you increase your profit potential with the use of leveraged instruments such as CFDs, a flexible alternative to traditional shares that is currently exempt from UK stamp duty.

CFDs: Like shares, but more flexible

Capture

 

CFDs are leveraged instruments, but you don’t have to use the leverage

If you had, say, £10,000 to invest in the stock market, you could deposit that amount into a share dealing account and purchase shares in a company. You might pay 3% commission to open the position, 0.5% in stamp duty and the full £10,000 will be tied up in your chosen shares with any profit or loss based on that exposure.

The same £10,000 worth of exposure can be secured with a CFD for a fraction of the initial outlay thanks to leverage, with the risk and reward the same as if £10,000 worth of traditional shares were held. But should you not be interested in leverage, you can always treat CFDs like shares. Simply deposit £10,000 into a CFD trading account and take the equivalent CFD position which will tie up just £500 (note that overnight financing costs will still apply). The remaining £9,500 is not tied up, so you can use some of that to take advantage of another short-term opportunity elsewhere, or simply leave it on the account to support any losses. Best of all, using a CFD means you pay no stamp duty!


What’s your view?

Think shares will rise? Take a long position by buying CFDs (buy low, aiming to sell high). Think they’ll fall? Take a short position by selling CFDs (sell high, aiming to buy low). For a more detailed rundown of CFDs, their mechanics, associated costs and some trading scenarios click here.

Page: 11

How Accendo Markets can help you

We won’t tell you what to do - it’s your call whether you buy or sell. Our aim is to provide the help you need, if you need it. We’ll highlight opportunities which may be profitable to you, the investor, and assist you in making your own trading decisions. Our approach focuses on these 3 elements:

  1. Education - not obligation
  2. Observations - not recommendations
  3. Assistance - not persistence

Our unique, award-winning service provides you with the help and tools you need to make appropriate trading decisions in the financial markets, both to grow and protect your capital. Just imagine how you’ll feel when you’re confident enough to make you own investment and trading decisions, rather than blindly following those of an expensive advisory broker who really has no better chance of calling the market than you anyway.

Before taking a position in the Index or Stocks, be sure to contact Accendo for…

  • Updates - How does the index or your preferred stock look in terms of investor sentiment? News and broker updates can emerge daily affecting share prices. Optimism can switch to pessimism in the blink of an eye depending on what’s going on around the world.
  • How to use CFDs and Spread Bets to maximise your profit potential.
  • How to use the tools available to minimise the risk involved

Page: 12

This research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. This investment research has not been prepared in accordance with legal requirements designed to promote its independence and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. This research does not constitute a personal recommendation or offer to enter into a transaction or an investment, and is produced and distributed for information purposes only.

Accendo Markets considers opinions and information contained within the research to be valid when published, and gives no warranty as to the investments referred to in this material. The income from the investments referred to may go down as well as up, and investors may realise losses on investments. The past performance of a particular investment is not necessarily a guide to its future performance. Prepared by Michael van Dulken, Head of Research

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
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