These Are the Stocks to Watch After U.K. Government's Crushing Brexit Loss

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The U.K. government suffered a humiliating defeat on Tuesday night as its Brexit deal was comprehensively voted down in parliament, increasing the uncertainty about what comes next in the process.

Prime Minister Theresa May lost the vote on her deal by 432 to 202, the worst defeat for a sitting government since 1924. The opposition Labour Party has already entered a no-confidence motion in the government which will come to the floor on Wednesday evening, raising the slim chance of new elections.

With little sign of the uncertainty Brexit has caused going away and the pound volatile, here are the key sectors to watch for reaction after yesterday’s vote:

Homes

  • Housebuilders are one of the most sensitive sectors to Brexit, given the impact the uncertainty has had on house prices and consumer appetite to spend. But sentiment in the analyst community has taken an upward swing recently:
  • JPMorgan analysts double-upgraded their recommendation on U.K. home builders, arguing that the risk of a no-deal Brexit has now fallen to a point where domestic stocks look cheap.
  • Bank of America Merrill Lynch analysts have also turned more upbeat on the industry mainly on the assumption that the chance of a no-deal Brexit has fallen.
  • Morgan Stanley said U.K. housebuilder shares now offer upside even against the most conservative sell-side targets and that the risk-reward on the sector is skewed to the positive.

Commercial Property

  • Just like residential property, Brexit uncertainty has eroded the value of commercial real estate -- particularly in London. Waning consumer confidence has also harmed footfall in British shopping malls and high streets. Unlike for housebuilders, there has been no positive swing in analyst sentiment on the sector:
  • Peel Hunt LLP analysts think total returns from U.K. real estate will continue to suffer in 2019 with shopping malls and other retail assets hardest hit. They prefer to allocate to industrial names and London offices.
  • Jefferies thinks the U.K. is headed for a property crash and estimates average shopping mall values will drop by 30 percent, adding that efforts to increase the number of restaurants in malls is not working because the overall footfall is so weak.

Banks

  • Domestic lenders like Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc would benefit from any certainty on the economic outlook and if consumer confidence was stronger.
  • Deutsche Bank AG noted U.K. bank shares outperformed their European counterparts in 2018 in part due to a narrowing of the “Brexit discount” baked into the shares as the likelihood of a no-deal scenario diminished. Ultimately, Deutsche Bank analysts think the fundamentals are better for British lenders than for their continental peers and prefer U.K.-exposed names to more international firms like HSBC Holdings Plc.
  • Morgan Stanley strategists have said banks along with real estate, housebuilders, and retailers would outperform in the event of essentially anything but a no-deal. They also think the valuation of British stocks makes them particularly attractive.
  • Bank of America Merrill Lynch, however, has said there’s little value in U.K. lenders under any scenario other than remain.
  • And S&P Global Ratings has said a no-deal Brexit could spark changes to credit outlooks for U.K. banks, albeit not rating downgrades in the short-term.

Retail, Leisure and Media

  • Brexit-related uncertainty has weighed heavily on the mood of British consumers. That impacts spending decisions and so has been a headwind for food and clothing retailers, airlines and tourism firms and even TV broadcasters.
  • Christmas trading updates from food retailers were peppered with Brexit, and both J Sainsbury Plc and Wm Morrison Supermarkets Plc sounded the alarm that British customers seem reticent to splash out. Tesco Plc, meanwhile, said it was holding talks to stockpile goods in the run up to the country’s divorce.
  • Berenberg analysts highlight consumer stocks among the “unloved” U.K. mid-cap names that have been battered by Brexit-related uncertainty -- but where the fundamentals are holding up.
  • Kepler Cheuvreux analysts said a second referendum would be a “boon” for broadcaster ITV Plc, which has suffered from the downturn in advertising spend linked to Brexit.

International Exposure

  • The knee-jerk reaction to the U.K scrapping Brexit would likely be positive across the board. But one area where that may not be the case is for those FTSE 100 names that earn the majority of their money overseas. Anything that brings more clarity and doesn’t point to an economic shock would cause the pound to jump, reducing the value of money made outside Britain.
  • This would include the likes of drugmaker GlaxoSmithKline Plc, spirits maker Diageo Plc and big defensive stocks such as British American Tobacco Plc.
  • Oddo BHF strategists said they are betting on U.K. equities as the downside appears limited. A no-deal Brexit would likely hit the pound and would favor U.K. exporters, they said.

Utilities

  • U.K. utilities would likely benefit from any market-positive outcome to the Brexit process, including remaining in the EU.
  • However, the no-confidence motion Labour has put forward raises the risk of new elections, which may be a headwind for water utilities in particular given previous Labour pledges to nationalize the industry.
  • In addition to U.K. water utilities and electricity companies, those running public transport like Stagecoach Group Plc or Go-Ahead Group Plc, postal service operator Royal Mail Plc and U.K. lender RBS have also been mentioned as possible nationalization targets by Labour.

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