One of the biggest impacts of Brexit thus far has been a weaker pound. In fact, it has fallen to its lowest level in a century versus the dollar, with it trading at £1/$1.23 at the present time. While this shows that confidence in the UK economy is at a low ebb, a weak pound could prove to be excellent news for these two stocks.
Diageo
Beverages company Diageo (LSE: DGE) is a truly international consumer goods play. Its main focus in recent years has been on developing its business in emerging markets such as China and India through joint ventures and acquisitions. This has positioned Diageo for further growth, since rising wealth across the developing world means that demand for alcoholic beverages should increase at a rapid rate.
Despite its international focus, Diageo reports in sterling. Certainly, drinks such as Smirnoff vodka and Guinness stout are popular in the UK. However, what matters to Diageo in the long run is its performance in larger markets such as China, India and the US. Therefore, even if Brexit causes reduced demand for alcoholic beverages in the UK, Diageo should still be a top performer.
Diageo is forecast to grow its bottom line by 16% in the current financial year. This puts it on a price-to-earnings growth (PEG) ratio of just 1.4, which indicates that it offers significant upside potential. And due to demand for beverages being relatively resilient, it also offers sound defensive characteristics too. Should investors become nervous as a result of uncertainty caused by Brexit, Diageo could become a popular stock for those seeking a flight to safety.
GKN
Engineering company GKN (LSE: GKN) is another global business. It operates in a wide range of geographies and this reduces its risk profile. It means that if Europe and the UK endure a challenging period, its exposure to other regions should be able to offset this somewhat.
As with Diageo, GKN reports in sterling and should gain a positive currency translation effect over the short run from a weaker pound. GKN is forecast to increase its bottom line by 1% in the current year and by a further 11% next year. This puts it on a PEG ratio of only 0.9, which indicates that it offers growth at a very reasonable price.
GKN also has significant income potential. It currently yields 2.7% from a dividend that’s covered 3.1 times by profit. This shows that shareholder payouts could increase at a much faster pace than its earnings over the medium-to-long term. And with demand within the key aviation and auto industries likely to grow as the global economy moves from strength to strength, GKN’s financial performance is set to improve. As such, it seems to be an excellent buy for the long run.
