Seeking Alpha

Beware The Brexit Bonus - The Effects Will Vary Wildly

by: Tim Worstall
Tim Worstall
Tech, banks, gold & precious metals, natural resources

The U.K. economy will indeed benefit from the removal of Brexit uncertainty whichever way the decision itself goes.

The markets will move from that removal. They'll also move on what type of Brexit happens.

But exactly what happens to which stock will depend upon how tied it is to the domestic, or international, economy.

There will be a Brexit bonus

There is no doubt that a resolution of Brexit will produce a bonus, a bolus, to both the British economy and the stock market. However, we've got to be selective in which part of the process is going to benefit what.

The resolution of the issue itself, either or any way, will reduce uncertainty and thus increase business investment and future growth. That will be good for stock prices in the medium to longer term and thus have some influence now.

However, we then come to exactly what that resolution is. At which point we've got to recall that the majority of the revenue represented by the FTSE100 is foreign revenue, about half the FTSE250 is foreign. A no deal Brexit would mean a further fall in the pound and thus a rise in the sterling value of that foreign revenue and profit streams. We'd see certain parts of the market rise on a disorderly Brexit.

We'd also see certain parts fall, those companies which are primarily or even exclusively domestic to the UK in their operations.

Yes, Brexit is going to be beneficial to the UK economy. Or, perhaps, we should say a resolution to the issue is. But how those gains are distributed depends on exactly how the issue is resolved.

It's not true the market will simply jump

One newspaper report has this:

Investors told to expect £240bn Brexit deal dividend

Perhaps, and in more detail:

Stocks in London would rise 10pc and the pound would claw back 8pc against the dollar if a Brexit deal is reached, according to market stress tests conducted by data giant MSCI.

Sterling and UK-exposed stocks skyrocketed into the weekend amid resurgent hopes of a breakthrough in talks between the UK and EU.

The domestic-focused FTSE 250 index advanced more than 3pc while RBS and housebuilders saw gains of more than 10pc. Sterling gained as much as 2.8pc on Friday, pushing above $1.27 for the first time in three months.

There, it's getting a little messy. Something that's worth explaining some more.

We can, for example, look at actual share price movements on the day. Looking just at the alphabetical list to Bunzl, we see that three of the FTSE 100 stocks actually fell. BAT [BATS:LN], BP [BP:LN] and AstraZeneca [AZN:LN]. Also, that two domestic housebuilders [BDEV:LN] and [BKG:LN] had around 10% rises on the day.

The news on Friday being that Boris Johnson might have found some form of words that allowed Brexit on Oct. 31 with some sort of deal. Well, I don't know how likely that is, but leave that aside. The point is that the effects of whatever the Brexit deal are will be unevenly distributed.


As I've been saying for some time now, the underlying British economy looks pretty strong. Despite the headwinds of uncertainty, we're still - just about - seeing growth:

Adding all of this up I reach the view that Brexit - of whatever form - is going to be just great economically. Of course, given my political views (I used to work for Ukip) I would say that. But I do think it's supportable.

The only problems we can see are related to Brexit uncertainty. Other than that we're doing just fine. So, remove the uncertainty and we should do rather better than just fine. Thus my view that a resolution to Brexit - either way - is going to be associated with a significant bounce in the UK economy. On the very reasonable grounds that it's the uncertainty holding it back at present.

So, reduce the uncertainty and I think the UK economy is going to do well. Better, certainly, than it will do in the continued presence of the uncertainty.

But which Brexit?

The standard analysis is that, from the current position, a no deal Brexit would lower sterling again. An exit with a deal would raise it from where it is. This takes us back to this point:

That major determinant of sterling's value is exactly as predicted - predictions and assumptions about the whether and the form of Brexit. The more likely it is to happen, the "harder" it is if it does, the lower sterling becomes. For us as investors - speculators is better here as a word perhaps - the strategy is obvious. Reading those tea leaves about how Brexit is going to play out means we can position ourselves. If we think that a no-deal Brexit will, in fact, happen, then go short, if that Remain will win the day, then long the currency.

So far, all just rather as predicted and "I told you so" is always so satisfying.

However, there's another point here. Some 75% of the revenue of the companies in the FTSE100 (UKX) is in non-sterling. This is because that index isn't, in fact, of the major UK companies. It's of the major companies listed in the UK. This is a rather different thing. There are a number of companies there - Antofagasta (ANTO:LN or OTCPK:ANFGY:US) one that springs immediately to mind - which have absolutely no operations in the UK domestic economy at all. Sure, they trade a lot on the London Metals Exchange - the company is a copper producer in Chile - but even that's usually done in USD. There are several other such companies, and many, many more whose major operations are outside the sterling area.

What this means is that, as sterling falls, the FTSE100 - all other things being equal - rises. For the profits made from those foreign operations are made in non-sterling, those profits are then worth more in sterling as the currency falls.

But, and this is the but

The effect is not going to be evenly distributed.

A Brexit without a deal will raise - yes raise - those stocks which are largely foreign revenue based. And lower those which are domestically focused. A Brexit with a deal will raise the market, yes, because of that better position for the entire UK economy. But it will be the domestically focused which do better in the process. The entirely foreign-based companies might still fall, as those stocks mentioned up at the top have done.

My view

We need to be careful and selective here. That dependence of the FTSE100 upon foreign revenues is interesting. But it's the specific reliance of a particular business that will really matter.

The investor view

Yes, a Brexit with a deal will be a buying opportunity. But still be selective. Go for those businesses with largely or even entirely domestic, not foreign, operations.

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.