EquitiesJul 18 2016

UK multinationals stand their ground

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UK multinationals stand their ground

As the referendum result started to sink in, UK stockmarkets recorded sharp downward movements in the days following the vote.

After a swift sell-off, the FTSE 100 index rallied on June 24 to a loss of just 3.2 per cent, although this was followed by a further 2.6 per cent drop on June 27 before stocks started to move higher in spite of an S&P credit rating downgrade.

But, while large caps appear to have found more solid footing, the FTSE 250 has been harder hit, with falls on June 24 and June 27 of 7.2 per cent and 7 per cent, respectively.

Viktor Nossek, head of research at WisdomTree, notes UK mid- and small-caps whose business models are more focused in the UK or whose trade profile is more concentrated in Europe are more prone to the downside risks, adding that hedging UK mid- and small-caps “may be warranted, not least given that more than 50 per cent of UK trade is with the EU”.

In contrast he says: “UK multinationals with a strong global footprint and lucrative dividend income offer defensive alternatives to the Brexit event that, on net, may benefit from improved exports if the pound weakens.”

KEY NUMBER
3.2%:The fall in the FTSE 100 index on June 24 following the vote

Laith Khalaf, senior analyst at Hargreaves Lansdown, points out: “While overall the FTSE 100 index has held up relatively well in the aftermath of the EU referendum, there have been some high-profile casualties, chief among them banks, housebuilders and airlines.

“Even in the banking sector there has been a substantial divergence in fortunes, with Lloyds seeing about a third of its value shaved off in two days, while HSBC came through relatively unscathed, suffering a price fall of around 5 per cent.”

Outside of the UK, European stocks also suffered with the Euro Stoxx 50 index slipping 3.3 per cent – in sterling terms – between the vote and the end of June 27, according to data from FE Analytics.

The big takeaway for those seeking to buy into market weakness: be wary of notionally cheap assets that face challenges Richard Turnill, BlackRock

Claudia Von Türk, global banking analyst at Lombard Odier, adds: “Though we expect weakness in the UK [banking sector], we believe the names in the periphery could be even weaker given contagion fears, notably in Spain but also in Italy.”

Italy faces a constitutional reform referendum in October, which is seen as a make or break for the current government.

She continues: “French banks, Nordics, Benelux and Swiss banks are less directly affected. However, there could be side-effects. If certain currencies, such as the Swiss franc and Danish crown, are perceived as safe havens, this might lead to even more negative rates – not a good thing for the banks.”

Meanwhile, some are highlighting the potential strength in US equities following the vote. The fall in the pound helped the S&P 500 post a 6.6 per cent return in the three days to June 27, and John Bilton, global head of multi-asset solutions at JPMorgan Asset Management, suggests US equities “could benefit from a flight to quality”.

Dominic Rossi, global chief investment officer of equities at Fidelity International, continues: “The rise in European risk premia following the UK’s decision to leave the EU further strengthens our conviction that US equities will continue to outperform. The US economy is showing signs of a rebound in consumption and we feel that the weak earnings environment of the last two years is fading.”

In addition, Richard Turnill, BlackRock’s global chief investment strategist, notes the result has spurred a flight to safety among investors, potentially creating opportunities.

“With most asset valuations looking fair to expensive, however, it’s important to focus on relative valuations. The big takeaway for those seeking to buy into market weakness: be wary of notionally cheap assets that face challenges, for example domestically focused European assets like UK real estate and European banks, and instead focus on assets with relatively attractive valuations and positive fundamental drivers, such as quality stocks [and] dividend-growth stocks. Indiscriminate selling of risk assets could translate into buying opportunities in these assets, including in UK-listed stocks that benefit from pound depreciation.”

Nyree Stewart is features editor at Investment Adviser