Boris Johnson’s First Month Good for Pub Stocks and Peppa Pig

(Bloomberg) --

In the month since Boris Johnson became the U.K.’s prime minister, the pound has taken a heavy beating from no-deal Brexit rhetoric and that’s had a significant impact on a few areas of the London stock market.

Sterling has fallen around 2.2% against the dollar since Johnson walked into 10 Downing Street on July 24. One side effect of that has been to make U.K. assets cheaper to overseas suitors, as seen with Greene King Plc and Entertainment One Plc. It’s also increased the attractiveness of companies making their money outside the U.K., while sapping sentiment toward domestic-focused segments like homebuilders and property stocks.

Johnson heads to the G-7 summit and breakfast with President Donald Trump this weekend where Brexit is likely to be a topic of fierce discussion. Here are some of the areas where the impact appears to have been felt most in the first month of Boris.

Pubs and Peppa Pig

On the face of it, British pubs should suffer from any talk of no deal and the resultant knock to consumer confidence that could entail. That is, unless there are potential suitors for those pub estates lurking in the background.

Greene King shares rocketed this week after Hong Kong’s CK Asset agreed to buy it for 2.7 billion pounds ($3.3 billion). The move, likely driven in part by the pound depreciating significantly against the Hong Kong dollar in recent weeks, also boosted Greene King’s pub sector cohorts, including Marston’s Plc and Mitchells & Butlers Plc, as speculation became rife that other deals could follow. Particularly given that the Greene King deal came after EI Group Plc, another pub firm, got a $1.6 billion takeover bid in July.

The weak pound also likely sweetened the appeal to U.S. toy firm Hasbro Inc. of making a $4 billion offer for Entertainment One, the TV and film producer behind the hugely successful “Peppa Pig” children’s series.

Exporters

Given the inverse correlation of the pound to the FTSE 100 index, the fall in sterling is creating benefits for companies that make most of their money in other currencies. Among the best performers in the last month are the likes of catering giant Compass Group Plc, medical-equipment supplier Smith & Nephew Plc and pest-control firm Rentokil Initial Plc, all of which make most of their money in dollars.

Note another example in Victrex Plc, a chemicals firm that makes polymers used in cellphones and cars. Barclays Plc analysts upgraded their rating on the stock this week as a weaker pound will be a “powerful mitigating force” for the company against headwinds in its end markets. A no-deal Brexit, therefore, could prove to be a positive.

Homebuilders

Housebuilders are one of the most sensitive sectors to Brexit, given the impact the uncertainty has had on house prices and consumer appetite to borrow and spend. Bellwethers like Persimmon Plc and Taylor Wimpey Plc have both underperformed the more domestically focused FTSE 250 index in the month since Johnson started, with the former down 5.8% and the latter 14%.

First-half results from the sector were broadly in line with expectations, albeit with the ongoing challenge of higher build costs hitting margins. But no-deal rhetoric and uncertainty about what kind of Brexit will eventually happen isn’t helping. “The installation of Boris Johnson has increased the risk of a hard Brexit in general and that will feed through into a weaker performance for the stocks,” Davy analyst Colin Sheridan said by phone.

Beach Holidays

The weak pound might be a boon for inbound tourism to the U.K., but it’s weighing on travel companies selling holidays to Brits going abroad. Budget beach holiday firm On the Beach Group Plc has had a miserable month after warning last week that full-year profit will miss expectations due to sterling’s decline.

Brexit and the falling pound are adding to wider international concerns for the sector, according to Bernstein analyst Richard Clarke. “There are stocks out there that certain investors will not touch while that overhang is continuing,” he said.

Shopping Malls

The FTSE 350 REITS Index is down 3.6% since Johnson took charge, about the same as the broader gauge. But Brexit sensitivity is not born equal in property and the companies most impacted, namely shopping mall owners Intu Properties Plc and Hammerson Plc, are suffering.

Intu is down 57% since Johnson was installed and Hammerson has slid 18%, both after results that disappointed analysts. The two face the twin headwinds of retailers going out of business as Brexit hits consumer confidence plus the threat of online shopping. The Brexit deadline falling less than two months before Christmas could also put more pressure on already struggling retailers and, ultimately on the direction of rents for mall owners, Bloomberg Intelligence’s Sue Munden said.

Banks

The main U.K.-focused banks -- Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc, as well as smaller rivals CYBG Plc and Metro Bank Plc -- have all underperformed the Stoxx 600 Banks Index since Johnson became prime minister, as investors get jittery about the U.K.’s economic prospects.

Lloyds and RBS, both key bellwethers for U.K. economic sentiment generally, have seen share prices fall more than downgrades to estimates would translate to, according to Macquarie analyst Robert Sage. That reflects the extra downside risks both face from the U.K.’s Brexit-bleakened outlook and until the overall climate improves, sentiment toward both is unlikely to brighten.

--With assistance from Sam Unsted.

To contact the reporters on this story: Simon Foy in London at sfoy8@bloomberg.net;Ivan Edwards in London at iedwards16@bloomberg.net

To contact the editors responsible for this story: Beth Mellor at bmellor@bloomberg.net, Paul Jarvis

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