This report is not a personal recommendation and does not take into account your personal circumstances or appetite for risk.
8 June 2016
Amid heightened chances of an ‘out’ vote on 23 June, this week sees a trio of interconnected stars aligning for UK blue chip companies pre Brexit. First of all, the godsend that was the dire US jobs report last Friday that single handedly tore up any plans the US Fed may have made purporting to a Summer interest rate hike. Will we now get one in September? December maybe? March 2017 perhaps?! In any case, how we’re still going to get two rate hikes this year is anybody’s guess. A weaker US Dollar indicates markets have priced out anything near-term.
A softer global reserve currency has also served to boost Asian currencies like the Yen – although that, like Gold, could well be a beneficiary of safe haven seeking too – and the Chinese Yuan (or Renminblingbling depending on the context). Add to this some positive (although negative) Chinese trade data and one can see a valid candidate for a refocusing of attention ahead of the UK EU in/out refrendum on 23 June.
Growth in both Chinese Imports and Exports has rebounded strongly from the early 2016 lows. They are both still negative but, while export growth is seen continuing to contract, import growth looks to be bottoming out according to forecasts by Trading Economics. This ‘bad data = good data’ is indicative of the transition China is currently experiencing from a manufacturing and export led economy to a services and import led one and there’s more data due out on the coming days.
Looking at stocks that have either a high amount of exposure to the services sector growth in emerging markets such as China, a low amount of exposure to the UK economy (just in case…!) or represent a good way to play the flow of money into safe havens pre Brexit throws up a couple of household names – namely Burberry (BRBY) and Randgold Resources (RRS). We discuss each below.
Burberry is known for being a popular brand among China’s growing middle classes and an indirect beneficiary of a more westernised society as the country transitions away from heavy industry and towards financial and other services. The company’s wares are much more popular abroad than they are here in the UK.
Randgold Resources is a gold miner whose share price has risen by 50% in 2016 alone (and some 76% from the low of 14 Sept 2015). Contrast that with Gold’s year to date advance of 17%! This is a prime example of how investing in gold miners can vastly amplify the profits (and losses, mind) one might make by simply investing in the commodity.
Despite the considerable gains for the ‘leave’ camp over the past week, the markets actually haven’t gone into freefall as many had forecast. That’s not to say they won’t, just that if they were going to then now might have been an appropriate time to do so! But oh, notice that the GBP/USD has been in an uptrend since the beginning of the year, when everyone said it would get slaughtered. UK Industrial Production went up in April. The latest quarterly UK NIESR GDP estimate was reported at 0.5% in May – the fastest pace of growth since January 2013. Brexit is hurting the UK economy – yeah, right.
Despite warnings of near term economic risk continuing to pour out of the Bank of England, it seems like business as usual – investors can always find a bit of positive news or data to placate themselves in times of uncertainty because it exists. And right now it seems as if people are remembering that the rest of the world also exists. Since it’s investors who drive the market, if they’re happy then the market’s happy.
Augustin Eden (Research Analyst)
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