Picking Brexit’s winners and losers

Whatever your politics and personal take on the referendum, there’s no denying that the Brexit vote has caused mayhem.
Political mayhem, for sure. Investing mayhem, undoubtedly. Economic mayhem? To some extent, that does depend on your politics.
But I’ll say this: if joining a free trade bloc is good news – and most economists certainly regard it as such – then leaving one can’t also be good news.

And in the short to medium term, the pain will be higher prices for Britain’s consumers, and fewer orders for Britain’s factories. In the longer term, the pain will be factories that don’t get built or expanded, and jobs that don’t get created.

Foreign earnings boost income stocks

All of which isn’t to say that Brexit will necessarily be devastating for investment portfolios. At the time of writing (Tuesday lunchtime, if you’re interested), my own portfolio is down just 3.5%.
How come? For one thing, a generous helping of international index trackers. In pound sterling terms, these have benefited from the currency devaluation that has taken the pound to a 30-year low since the polls closed on Thursday evening.
And for another thing, a generous helping of income-centric stocks. GlaxoSmithKline, for instance, is up 6% since the Brexit vote. Reckitt Benckiser is up 4.5%. Royal Dutch Shell is up. And so on, and so on.
Why? It’s not difficult to see. It’s no secret that around two-thirds of the FTSE 100’s earnings are from overseas, and – hey presto! – thanks to the post-Brexit slump in the pound, these earnings are now worth rather more in pound sterling terms.

Housing and finance hammered

That said, other stocks have seen significant damage. Picking three stocks more or less at random, my holding in takeaway food outlet Greggs, for instance, has been hammered, and is down 15%. Lloyds is down 25%. And Legal & General is down 26%.

And this, don’t forget, is after quite a decent recovery on Tuesday, with the market up 2.8% at the time of writing.
In short, the Brexit vote has caused real damage to some stocks, and investors top-heavy in finance stocks and housing will be nursing hefty losses.
Despite which, the FTSE 100 as a whole is above 6,150 – almost 600 points above its year-to-date nadir on February 11th, when it fell to 5,537. Thursday’s referendum may have been bad news for investors, but the market as a whole is undeniably more buoyant – much more buoyant – than back then.

UK economy vs. UK investments

So what to do, going forward?
My take, for what it’s worth, is that the longer-term damage will be outside the FTSE 100. Buoyed by hefty overseas earnings, most Footsie companies will shrug off Brexit worries.
That said, as with the more UK-centric FTSE 250, I expect to see jobs and business activity gradually move to inside Europe’s single market, should the government be unable to secure decent access on acceptable terms.

Either way, while the UK economy might suffer, the companies in question won’t. But jobs that would have gone to British workers will now go overseas, inside the single market.
Put another way, jobs might be lost at Honda, Toyota, Nissan, and Jaguar Land Rover – but those companies (and in many cases the companies making up their supply chains) aren’t part of the FTSE 100 or FTSE 250.

Playing the FTSE 250

In short, in investing terms, the fallout from Brexit should be relative.
Over the next decade, I expect to see GDP growth lower than it otherwise would have been, especially if the pound remains depressed, dampening consumer demand through higher prices. Consumer activity, don’t forget, underpins about 60% of GDP.
But perversely, shares in British companies could do reasonably well – particularly smaller, UK-centric FTSE 250 companies with opportunities to grow or relocate abroad.
One way to play this is to buy a FTSE 250 index tracker. On Friday, as the FTSE 250 fell 8%, I did just that, buying HSBC’s HMCX FTSE 250 ETF.
But I suspect that greater rewards can be had from figuring out just which FTSE 250 businesses will benefit from Brexit. And here, I imagine that the Motley Fool Share Advisor analysts will be hard at work.

Bargains ahead?

Playing the months and years of political uncertainty that lie ahead will be tougher.
Get used to an era where share prices are more closely linked to political events than has been the case for some years, in other words. To that extent, it’s back to the 1970s and 1980s.
So keep some power dry, in other words. Shares plunged on Friday – and I rather think we’ll see a few more days when market wobbles throw up some potentially tasty bargains, for investors brave enough to bag them.

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Malcolm owns shares in GlaxoSmithKline, Reckitt Benckiser, Royal Dutch Shell, Greggs, Lloyds Banking Group, and Legal & General. The Motley Fool UK has recommended shares in GlaxoSmithKline, Reckitt Benckiser and Royal Dutch Shell. The Motley Fool UK owns shares in GlaxoSmithKline.