Buying Opportunities Amidst High Recession Risk In U.K.

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Includes: BTAFF, BTI, DEO, FXB, RYCEF, VOD
by: Macro Analyst

Summary

UK flash PMI results reveal first effects of a Brexit on the economy.

UK economy contracts at steepest pace since early-2009, making a recession very likely.

Buying opportunities are export-oriented companies which profit from the falling pound.

The Markit Flash UK Composite Output Index fell to its lowest reading since April 2009. At a reading of 47.7 for July, the index indicates GDP contraction. The PMI report reflects the prevailing uncertainty of British companies following the EU referendum.

The flash UK Services PMI Activity Index fell to 47.4. Considering services account for almost 80% of the economy, the UK heading for a recession becomes increasingly likely. The Flash UK Manufacturing PMI came in at 49.1.

What are the effects of the depreciation of the pound (FXB)? The PMI report mentions higher input prices along with a rise in exports, as it can be assumed. David Noble, Group Chief Executive Officer at the Chartered Institute of Procurement & Supply commenting in the PMI report: "Weaker sterling has driven a steep rise in input prices for manufacturers but there is a glimmer of positivity with the new exchange rate encouraging a rise in export orders. However, with a subdued global economy, it is not yet clear whether these opportunities will materialize in the long term."

The BoE is now under even more pressure to take action by a rate cut or even QE - which will take the pound further down.

I believe British export-oriented companies present excellent buying opportunities. These are defensive companies such as Rolls Royce (OTCPK:RYCEF), British American Tobacco (BTI), DIAGEO (DEO) and Vodafone (VOD). Most of their revenues are generated outside of the UK. I will take a closer look at some of them in coming articles.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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