Can investors profit from the new Brexit ‘High 50/Low 50’ indexes?

We don’t know whether Brexit will deliver rewards for UK-focused stocks or those that look beyond the UK, but we have some ideas that might help.

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Stock index provider Bats has launched two new indexes designed to act as barometers for assessing how Brexit is impacting UK companies. As it notes: “Currency movements and changes to the cost of buying or selling goods and services are both fundamental elements associated with Brexit and will have a material impact on companies’ profitability over the coming years.”

The two new indexes — UK Brexit High 50 and UK Brexit Low 50 — are derived from its existing UK 100 Index, which tracks the top 100 UK-listed companies based on market capitalisation, much the same as the FTSE 100.

The UK Brexit High 50 consists of the 50 companies that earn the largest portions of their revenues from the UK (on average in excess of 70%). These include the likes of Morrisons, Persimmon, Royal Bank of Scotland and United Utilities.

Meanwhile, the UK Brexit Low 50 contains the 50 companies that earn the smallest portions of their revenues from the UK (on average 10%). Among these are BP, Burberry, GlaxoSmithKline and Rio Tinto.

Contrasting performance

The High 50 and Low 50 have delivered markedly contrasting performances since the Brexit vote in June last year. Having plunged nearly 20% in the aftermath of the result, the High 50 has gradually recovered its losses and is currently trading back at its pre-vote level for a 0% return over the period. The Low 50 has posted a stunning 29% gain.

Unfortunately, whether you’re convinced UK domestic-focused stocks are now undervalued or whether you’re confident foreign earners will continue to outperform, there are no funds or ETFs that track the High 50 and Low 50.

Contrarian opportunity?

However, if you’re looking for a one-stop-shop to play the High 50 theme, renowned fund manager Neil Woodford’s Income Focus Fund could be a good choice as something of a proxy. This is because Woodford is convinced that “a contrarian opportunity … has emerged in domestic cyclical companies where valuations are too low and future growth expectations far too modest.”

He’s positioned the fund, which launched in March this year, to capture this opportunity. As of the end of October, nine of his top 12 holdings featured in the Bats UK 100 Index. The High 50/Low 50 breakdown was as follows:

AstraZeneca Low 50
Legal & General High 50
Imperial Brands Low 50
Lloyds High 50
Barratt Developments High 50
Taylor Wimpey High 50
Next High 50
SSE High 50
Aviva High 50

The preponderance of stocks with a UK domestic focus among his blue-chip picks is equally evident among his mid-cap and smaller company holdings. Like the High 50 Index, the performance of Woodford’s fund has been lacklustre to date. However, if he’s right about the contrarian opportunity, both the index and his fund could outperform the wider market in the coming months and years.

Of course, not all investors share Woodford’s view. Indeed, some are very keen to positively avoid stocks with a UK domestic focus. Either way, though, the two index constituent lists on the Bats website (linked to near the start of this article) are a useful resource for investors — even if you’re seeking to hedge your Brexit bet with a balanced portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca, BP, Burberry, Imperial Brands, and Lloyds Banking Group. 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.

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