These Are the Stocks to Watch as Brexit Reaches Its Endgame

(Bloomberg) -- Brexit or no Brexit? Deal or no deal? Election or no election?

These are uncertain times for U.K. stock investors and with markets on tenterhooks, most investors are battening down the hatches and considering the various scenarios that might play out over the coming days and months. U.K. Prime Minister Theresa May is expected to attack supporters of a second Brexit referendum on Monday as her cabinet fends off reports this option had become the subject of talks within the government.

Here’s a look at the sectors to watch should the U.K. leave the European Union either with or without a deal, reverse Brexit or even hold new elections:

Homes

  • Housebuilders are one of the most sensitive sectors to Brexit given the impact the uncertainty has had on house prices and the consumer appetite to spend the money it takes to buy a property.
  • Analysts at Liberum have said the sector could see a 20% upside in the case of a smooth Brexit.
  • According to UBS AG, housebuilders have become a “Brexit football” being kicked around by the market, but the bad news is already priced in.
  • Bloomberg Intelligence says the outcome for the industry will be bad whether Brexit is hard or soft, though the impact of the latter would be much harsher.
  • Statistics aren’t helping: Two data sets out on Monday alone showed U.K. house prices dropped for a second consecutive month in December and that actual selling prices grew at the slowest pace in more than 6 1/2 years.

Commercial property

  • Just like residential property, the same Brexit uncertainty has hit the value of commercial real estate, particularly in London. Waning consumer confidence has also harmed footfall in British shopping malls and high streets. This has weighed on stocks like British Land Plc, Land Securities Group Plc and Hammerson Plc, the latter of which is down about 34 percent in 2018.
  • Barclays analysts have said near-term sentiment around the sector is likely to remain negative, but that the London office market in particular has held up well post-the Brexit referendum. Still, risks are skewed to the downside, they say.

Banks

  • Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc would in particular benefit from the extra degree of certainty a Brexit deal would bring and the boost it would give to consumer confidence. Conversely, no deal would have the opposite impact, though the Bank of England recently said the U.K.’s lenders would be able to cope in even the worst outcomes.
  • Analysts at Citi have said Metro Bank Plc, one of the U.K.’s so-called “challenger banks” which sprung up after the financial crisis, would be at risk in a no-deal scenario.

Airlines and Travel

  • British Airways-owner International Consolidated Airlines Group SA and budget carriers EasyJet Plc and Ryanair Holdings Plc all have significant revenue exposure to the U.K., according to analysts at Bernstein. The risks for tourism firm TUI AG should be limited given its current valuation, they say.
  • A report in The Sunday Times indicated U.K. families will be told not to book any vacations after March 2019 under contingency plans being drawn up for a no-deal Brexit. Though only plans, it clearly indicates the threat a no-deal outcome would have for the travel industry.

Retailers

  • “The complex Brexit process appears to have strongly impacted consumers’ willingness to spend in the critical run-up to Christmas,” Jefferies analyst James Grzinic wrote in a note last week, citing data from market researcher Kantar. That could impact most names on the high street, particularly those that normally enjoy big customer spending in the festive period like supermarkets Tesco Plc and J Sainsbury Plc.
  • Recent updates from the retail sector make for grim reading. Sports clothing and equipment retailer Sports Direct International Plc and online fashion retailer Asos Plc have both reported a sharp slowdown in November.
  • Lower spending on the high street would also put pressure on pub and restaurant chains like Greene King Plc, Mitchells & Butlers Plc and Restaurant Group Plc.

International Exposure

  • The kneejerk reaction to the U.K scrapping Brexit would likely be positive across the board, but the one area where that may not be the case is in those FTSE 100 names that earn the majority of their money overseas. Anything that brings more clarity and doesn’t point to a huge economic shock would cause the pound to jump, reducing the value of money made outside the U.K.
  • This would include the likes of drugmaker GlaxoSmithKline Plc, spirits maker Diageo Plc and big defensive stocks such as British American Tobacco Plc.

Utilities

  • Should the U.K. hold new elections, increasing the chance of a Labour administration, utilities would be the key sector to watch.
  • A Labour government would bring the risk of nationalization. The party has said that it would take water utilities including the likes of Severn Trent Plc, United Utilities Group Plc and Pennon Group Plc back into state ownership.
    • RBC Capital Markets analyst John Musk said in a November report that nationalization remains a remote risk given it would require “many ifs” to materialize for this to become a clear and present threat.

Other sectors and names that Labour has talked about as possible candidates for nationalization include:

  • Power providers like Centrica Plc and SSE Plc
  • Transport operators running Britain’s railways such as FirstGroup Plc or Stagecoach Group Plc
  • Postal service operator Royal Mail Plc
  • Royal Bank of Scotland, which Labour has said it would break-up to create new local public banks

©2018 Bloomberg L.P.