The Stocks to Watch After U.K. Sends May Back to Brussels

(Bloomberg) -- U.K. lawmakers gave Prime Minister Theresa May a mandate to head back to Brussels and renegotiate the most contentious part of her Brexit proposal in a series of votes on Tuesday.

MPs rejected amendments to delay the current exit date of March 29 and she’ll head back into talks with a European Union that has warned it will not even consider her demands regarding the Irish backstop. Ultimately, the upshot appears to be more uncertainty and while MPs voted in favor of a non-binding amendment stating parliament is against leaving without a deal, the risk of a no-deal outcome appears to have risen. The pound is lower.

Here are the key stock sectors to watch for reaction after yesterday’s vote accompanied by a few recent developments and analyst views for each:

Homes

  • Housebuilders are among the most sensitive sectors to Brexit, given the impact the uncertainty has had on house prices and consumer appetite to spend or take out mortgages. But analysts have been positive:
  • Redburn analysts said housebuilders has proven “remarkably” resilient despite the lack of visibility on Brexit and amid weak sentiment in the U.K. housing sector
  • Recently, JPMorgan analysts double-upgraded their recommendation on U.K. home builders, Bank of America Merrill Lynch analysts have turned more upbeat and Morgan Stanley said U.K. housebuilder shares now offer upside even against the most conservative sell-side targets.

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. And there are few signs of any optimism emerging:
  • Mom-and-pop investors are fleeing U.K. property funds at the fastest pace in more than two years and the funds themselves are left with unloved malls on their books.
  • Peel Hunt analysts recently said they think total returns from U.K. real estate will continue to suffer in 2019, with shopping malls and other retail assets hardest hit; Jefferies thinks the U.K. is headed for a property crash and estimates average shopping mall values will drop by 30 percent.

Banks

  • Domestic lenders like Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc are unlikely to benefit from continued uncertainty about the way forward, a lack of visibility on the U.K’s economic outlook and softer consumer confidence.
  • 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 affects 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 have highlighted 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.

International Exposure

  • The FTSE 100 is dominated by companies that make their money outside the U.K., so a weaker pound is a big boon.
  • Should the market show displeasure at the outcome of the vote and the pound fall, this would boost 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.

Everything Else

  • U.K. domestic stocks that fall in between the cracks of the above would likely benefit from any clarity the vote gives to the Brexit process. This includes:
  • Power and water utilities like Centrica Plc, SSE Plc, Severn Trent Plc and United Utilities Group Plc
  • Public transport operators like Stagecoach Group Plc or Go-Ahead Group Plc
  • Public sector outsourcing firms like Babcock International Group Plc and Capita Plc
  • Postal service operator Royal Mail Plc

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