Brexit Roundtable: A Q&A With Our European-Focused Contributors
By SA Editors:
Today, September 26, 2019, we've reassembled our Brexit panel and have prepared an updated roundtable Q&A. These freshly updated views are available to PRO+ Subscribers here.
Given so many twists and turns in the Brexit proceedings over the past 3 years, Seeking Alpha has surveyed some of our European-focused investors to help readers get a handle on what to expect, and how that will affect the economy and financial markets.
We initially conducted a roundtable Q&A at the end of March. Our newsletter with all the details is copied below. Many of the prognostications were spot-on.
Our panel's updated expectations and forecasts are available here.
(From March 28, 2019)
Investor Q&A on Brexit Expectations, Market Reactions
Let us introduce our panel for today's Q&A:
- Blue Sky Capital is a former buy-side analyst who is based in the U.K. They are a fundamental-driven long-term investor.
- Craig Erlam works for Oanda Corp, a forex broker with global operations. He focuses on both fundamental and technical analysis.
- Early Retiree is a long-term Seeking Alpha contributor based in mainland Europe. He also runs the "Stability & Opportunity" Marketplace service here at Seeking Alpha.
- Marc Chandler is the Chief Market Strategist for Bannockburn Global Forex LLP.
Seeking Alpha: Do you ultimately believe that MPs will agree to a Brexit proposal tabled by PM Theresa May?
Erlam: This is still my base case as it's the only option fully on the table that ensures we don't need a long extension. This is especially the case after the indicative votes on Wednesday when no other potential option secured a majority.
Blue Sky Capital (Blue Sky): Ultimately, no, but the numbers are finely balanced. There are probably enough hardline Brexiteers to deny May the majority she needs.
Early Retiree: No. There will probably be another, much longer delay.
March Chandler (Chandler): No. I think a long extension is most likely scenario with UK participating in May EU parliament elections.
SA: Under a no-deal Brexit, what is your assessment of the economic shocks that will hit the U.K? Are the fears possibly overhyped? Or are the risks still underappreciated?
Blue Sky: My personal view is that a no-deal Brexit would (cause) a sharp short-term shock as well as an extended headwind for a number of years. Some of this will be purely for practical/logistical reasons - there is a lot of trade that depends on a frictionless flow of goods and services between the UK and the EU. But a lot of the headwind will also be for psychological reasons, as both businesses and consumers defer spending out of caution amid general negativity in the news.
I suspect the risks are still under-appreciated. The GBP/USD rate has been relatively solid YTD. A number of bank stocks like Lloyds (NYSE:LYG) have also done very well . And share prices of import-dependent retailers like Tesco (OTCPK:TSCDF) (OTCPK:TSCDY) are nowhere as weak as they need to be to reflect higher import costs or even shortages.
Erlam: I would argue they're over hyped along "remainer" crowds and hugely underappreciated in Brexiteer circles. There will be enormous efforts made by the government and Central bank to mitigate shocks where possible, at great expense, but this is unlikely to be enough to prevent a shock altogether and there's certain issues they simply won't be able to fully mitigate for. This will all take its toll on the economy at a time when the global economy is (stalling) and therefore won't act as a shock absorber.
Early Retiree: Most businesses are probably well prepared by now. That said, the actual dynamics of the short-term turmoil that would inevitably ensue a hard Brexit might lead to some unpredictable outcome - which is what markets are afraid of and what they are pricing in.
Chandler: I think (leaving) without an agreement is risky and asymmetrical. For example, the EU takes almost half UK exports. UK takes only 10% or so of EU exports.
SA: How do you think the FTSE will react under various Brexit scenarios?
Early Retiree: Over time it will recover under any scenario. The short-term impact will be mild even with a no-deal Brexit, as most of the damage has already been done.
Blue Sky: Performance of the FTSE will be very currency-driven - more than two thirds of the revenues of FTSE 100 companies are from outside the UK; even for the next set of companies in the FTSE 250, the non-UK proportion of revenues is about half.
Ironically, in a Hard Brexit, both the FTSE 100 and FTSE 250 may do quite well in nominal GBP terms, because the pound will likely weaken significantly, more than offsetting the hit to the share prices of domestic companies. This was in fact what we saw in 2016 after the EU referendum - both indices performed strongly after a bit of initial weakness. However, non-UK investors would likely lose money in real terms.
In a Soft Brexit, there will likely be a rebound in a number of domestic UK plays, but I would also expect to see the pound appreciate, which means a hit to the share prices of companies with non-UK earnings. I think the effect will still be positive on balance. In real terms, this is likely the better outcome for holders of UK stocks.
Chandler: The International part such as FTSE100 can outperform if sterling lurches lower.
Erlam: The way the FTSE has behaved since the referendum has been linked to the currency, with a weaker sterling helping it outperform its peers and vice versa. I would expect this to continue with a no deal Brexit therefore potentially being most supportive for the index. Of course, is also highly driven by the global economy and how stock markets in general perform so won't be entirely Brexit driven.
SA: How do you think the British Pound (GBP) will react under various Brexit scenarios"
Chandler: The longer the extension and the softer the amputation, the better for sterling (NYSEARCA:FXB).
Early Retiree: Over time it will recover anyway. The Euro is a flawed currency and large markets with important currencies close to the EU (think Norway, Switzerland) have currencies that are sometimes even dangerously strong for their countries. The same should happen to the Pound.
Blue Sky: In my opinion, the pound would depreciate sharply (up to 20%) in a Hard Brexit, but appreciate by 10% or more in a Soft Brexit
Erlam: No deal is clearly the worse case scenario for the pound given the economic risk and unknown nature of it. What makes this worse is the fact that markets are not pricing this in, almost at all it seems, which makes potential downside all the greater.
If May's deal gets over the line, or an even softer Brexit via an extension then (it) would be positive for the pound as it removes uncertainty, but upside could be limited given how much is already priced in.
SA: What specific sectors/companies are likely most vulnerable to a no-Brexit deal economy, in your opinion? (ie - Financials, Energy, Consumer Goods, Telecom)
Blue Sky: I would highlight banks and retailers as the most vulnerable to a Hard Brexit economy. Banks would suffer from higher credit losses, probably lower interest rates (which will hit their net interest margin), as well as a general reduction in economic activity. Retailers would suffer as they tend to be domestically-focused but rely on imports.
I would also highlight the tail risk of a future Labour government to supposedly safe sectors like Utilities and Telecoms. Brexit has been absorbing so much attention that we hardly have time to think about what happens next - and the Labour Party under Jeremy Corbyn and John McDonnell has many non-business-friendly policy ideas. Utilities and Telecoms have suffered under tight regulations even under Conservative governments, and would do even worse under a Labour one.
Early Retiree: Over the long term the UK will do fine under any scenario. In the near term the automobile sector will probably be hit hard as it will have to reorganize supply chains to avoid tariffs.
Chandler: Outside my expertise, but I don't see how it is good for UK banks, but this may have been largely discounted. A no-deal exit might force BOE into a rate cut, which is not necessarily good for banks. A drop in sterling though might make UK REITs attractive
SA: Are there any specific UK (or other European) stocks that look attractive here, and why?
Early Retiree: I like Liberty Global (NASDAQ:LBTYA) (LBYTK) which will largely be a UK business following the sales of several European assets to Vodafone (NASDAQ:VOD) and Sunrise (OTCPK:SNMMF). It has certainly suffered from being associated with Brexit risks and currency depreciation. But its business is among the most stable ones you can think of, even with the most terrifying no-deal Brexit. And being largely focused on the UK after these transactions is actually a great plus, since the UK is where it has the best competitive position.
Blue Sky: I think there are some good stocks to own for any long-term investors who can tolerate a bit of short-term volatility.
I have previously written about Rightmove (OTCPK:RTMVF) (OTCPK:RTMVY) on Seeking Alpha - this is a provider of mission-critical solutions to estate agents, who will keep using it so long as they are still in business. In a Hard Brexit some estate agents will go out of business, but most will come back. In normal times, Rightmove has been growing earnings at about 10% a year.
I have also written about Schroders (OTCPK:SHNWF)- this is a best-of-breed asset manager which, while UK-headquartered, has 60% of its clients and an even higher proportion of investment products being based on markets outside the UK. The non-voting stock currently pays a >5% dividend, and Schroders maintained its dividend even through the 2008-09 crisis.
SA: In light of the Brexit fiasco, what is your outlook for the European Union in the long run, politically and economically?
Chandler: I think the EU has demonstrated amazing unity during these negotiations. I think, as Ben Franklin told struggling colonies fighting the greatest empire of the time, "hang together or hang separately." The political will, like we saw during the Greek crisis, is paramount.
Early Retiree: When I warned about the upcoming EU elections in my Xmas interview here on Seeking Alpha, I felt a bit lonely. Now various observers are starting to see the risks. The EU will make (and will have to make) a decisive move in 2019: either towards more unity or towards greater disaggregation and an even more acute impossibility to reform itself. This move will have an important impact on financial markets and maybe the current correction partly anticipates the related risks. The EU will vote for a new parliament in May and unpredictable anti-establishment movements will likely do very well in several key countries like France, the Netherlands, Italy and even Germany. How this will play out is anyone's guess. While the EU is certainly the very cause of some of the mess it currently finds itself in, thanks to its united efforts, it has also managed to muddle through and control that mess. With an even less united EU, it could suddenly explode.
Erlam: The European Union faces some great challenges over the next year or so, both economically and politically. Italy being in recession and Germany teetering on the brink highlights just how vulnerable its economy is. The yellow vest movement in France and other populist movements elsewhere are another major issue and likely explain why the EU is both keen to get on with Brexit and ensure the UK is worse off. It didn't choose Brexit and will be keen to make an example of the UK for any other country considering it.
Blue Sky: I think the blame for the Brexit fiasco has largely been on the U.K. side, so I wouldn't draw any conclusions on the E.U. based on this.
SA: Other comments?
Early Retiree: From the very beginning I've thought Brexit wasn't going to happen, as the UK and the EU economies have become too closely intertwined over the 46 years. I had predicted an excellent chance for a Brexit win in the referendum, but also a low probability for Brexit to happen, despite "No" being the winner. I think there will be a long delay and another referendum.
Chandler: This will not be seen by future generations as Britain's finest moment, I think. The triggered Article 50 with little thought given to their commitment under the Good Friday Agreement.
We've reassembled the Brexit panel, and have prepared a follow-up roundtable Q&A. These freshly updated views can be seen here.
See also FX Weekly: Germany - Economically Not So United on seekingalpha.com
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.