At the EU summit last month it appeared it was a ‘No go for BoJo’ with regards to reopening the Withdrawal Agreement and by extension the issue of the Irish Border. Then, PM Johnson took matters into his own hands, by having the Queen approve a suspension of Parliament, which provided very little time for MPs to try and pass legislation blocking a No Deal. With this in mind, what opportunities are there in a No Deal Brexit landscape?
Firstly, in a No Deal scenario, the British Pound (GBP) is very likely to depreciate in value. It has already fallen over 15% from pre-referendum levels in 2016, and sits just above multi-year lows against the Euro and USD. Bad news for some, but remember that some FTSE 100 companies are heavily net exporters, meaning a falling pound boosts their profits when they repatriate them back into the UK from other currencies.
Take Burberry Group (LSE:BRBY) for example. Since the referendum its share price has doubled, even during an uncertain UK retail environment and falling demand for luxury goods domestically. A large part of this can be put down to the fact it sells (and manufacture) abroad for the most part, receiving revenues in multiple currencies. The weakness in the pound has really helped it to boost profits, adding a double digit benefit to its bottom line. If we see a No Deal Brexit with a weaker pound to follow, Burberry could make further gains.
Secondly, with a hard Brexit, the Bank of England will likely cut interest rates from 0.75% to 0.5% or even lower. In this scenario, whilst in the short term you will see banking stocks take a hit – due to a squeeze on their net interest return lines – I believe they will represent a strong long-term buy.
I favour HSBC Holdings (LSE:HSBA) in this case as a buy in the immediate aftermath of a No Deal confirmation. Its share price is at the lowest since the referendum in 2016. HSBC benefits not only from overseas earnings (boosting it from a GBP fall) but also has enough of a large presence here in the UK to also be bought at historically cheap levels. Its yield is still good and when the noise over No Deal subsides (be it a year or even a decade) and growth returns, higher interest rates and inflation will provide an outperformance for banking stocks operating in the UK.
Overall, be it from buying Burberry before any ‘No Deal’, or buying HSBC shortly after ‘No Deal’, you can hopefully build into a positive return environment despite a potentially market-negative Brexit scenario. Whilst No Deal is not confirmed, being ready to Brexit-proof your portfolio is certainly not a bad idea. Over to you, BoJo!
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Jonathan Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended Burberry and HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019