Time to bag a Brexit bargain?
With just months until the UK is due to leave the European Union, it’s anyone’s guess how things will play out.
History looks inevitable in retrospect, but not to those making it. Right now every faction from dedicated Brexiteers happy with No Deal to those backing Theresa May’s agreed divorce terms to Remainers who want a second Referendum could all argue they’re in with a shot.
Many of us are fed up with the whole saga, but that doesn’t make the uncertainty go away.
Besides, if you think the pitchfork-wielding mob on the BBC’s Question Time is disgruntled, take a look at The City.
Stock markets hate uncertainty, and Brexit is a textbook illustration on the ruinous impact of headlines stuffed with too much maybe, might, and murky.
Investors face a quadruple threat from Brexit:
- We don’t know which kind of exit we’ll get, or whether we’ll even see a Brexit. This makes it hard to gauge where the economy is going.
- Companies are in the dark, too. They may or may not be affected by the kind of Brexit we eventually get, but for now they must waste time and resources preparing for all outcomes.
- The British pound has about as much stability as a bowl of blancmange on its gap year crossing bungee jumping off its bucket list – and the FTSE can soar or crash on the back of Brexit-driven currency swings alone.
- Interparty fighting over Brexit means the government is not secure. We could see a General Election and the most left-leaning Labour leadership for generations. That might be what the country needs – I’m not making a judgment here either way. But many investors are worried by it.
All this uncertainty means UK-focused companies such as banks, retailers, property companies, utilities, and restaurants have been sorry places to be invested in 2018.
So great has the gloom become I wonder if it’s time to hunt for bargains?
UK-centric shares might already price in most of the worst scenarios. If you believe we’ll muddle through and avoid falling off the economic cliffs in March, they could therefore be primed for a bounce.
Here are three beaten-up British companies that may repay a leap of faith:
Housebuilder Persimmon(LSE: PSN) has been one of the hardest hit shares in the recent kerfuffle – its shares fell 10% on the day then-Brexit Secretary Dominic Raab resigned from the Cabinet. It’s easy to see how any economic slowdown from a disruptive Brexit could curb demand for new homes. Yet it might also put rate rises on hold, sustaining mortgage affordability for those who do want to buy. Persimmon has a solid balance sheet and sports an 11% forecast dividend yield. Tempting for those who think everything will turn out ok.
Royal Bank of Scotland Group
Another reason investors might be shunning Persimmon is because the market fears political turmoil could usher in a left-leaning Jeremy Corbyn government. Labour might end the Help to Buy scheme that has been at least as good for home builders as home buyers. Similarly, some believe a Labour government could nationalize The Royal Bank of Scotland(LSE: RBS) – or at least use its large stake to redirect lending for social good rather than profits. RBS’ shares had been recovering until the recent market sell-off. The bank is profitable for the first time in nearly a decade, and it sports a prospective dividend yield over 5%, yet it’s priced at less than ten times earnings. Brave Fools may consider it a bargain.
Political risk junkies will find other opportunities at knockdown prices on the London Stock Exchange these days – utilities such as Centrica and Severn Trent, for example. But for those who feel the economic risks of an uncertain Brexit are quite enough without adding political risk, ITV(LSE: ITV) may be worth a ponder. Results from the TV producer and broadcaster have underwhelmed recently, with ITV blaming Brexit fears for a weak advertising market and its stagnant profits. However its online and studios businesses are doing well, and the latter in particular could be attractive to a foreign predator. The studios also earn useful overseas income to set against UK weakness, which supports a dividend yield near 6%. If you’re going to spend every evening watching Brexit play out on the news, you might as well try to profit from it!
Owain Bennallack has no position in any of the shares mentioned. The Motley Fool UK has recommended ITV. 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.