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Which stocks would benefit most from a Brexit reversal?

Do you think the UK economy will be better off outside the European Union? Even now that growth forecasts have been slashed to almost nothing? The OECD doesn’t agree with you.

The economic think tank reckons a change of heart by the British public through a second referendum, or some other change in government leading to our remaining in the EU, would give a “significant” boost to economic growth.

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As we stand, the organisation sees the UK economy growing by a mere 1% in 2018, which is way down from the 2%-3% predictions we were hearing before that fateful day in July 2016.

‘No deal’ disaster

The worst scenario envisaged by the OECD is an exit with no deal, defaulting to World Trade Organisation rules on imports, exports and tariffs — which it says would see a drop off in investment, a further run on the pound, and a cut in the UK’s credit rating.

Whatever happens, it’s hard to believe the current time-wasting shenanigans will be concluded by our official departure date in 2019, and that uncertainty is surely going to harm UK shares for some years to come — although some sort of post-Brexit transition period would help.

In the unlikely event of a change of heart, or at the very least a favourable business-friendly exit deal, which stocks would benefit and which ones should optimistic investors buy?

The banks

The most obvious example must be the banks, with a possible loss of business and jobs to other EU financial centres like Frankfurt currently weighing heavily on the sector. Barclays shares, on forward P/E multiples of nine to 11 when dividend yields are expected to reach 3.4% in 2018, look too cheap, and a positive elimination of EU uncertainty would surely trigger a re-rating.

The banks that are mainly focused on retail and corporate banking and shying away from investment banking are hurting too, in my view even less rationally. Lloyds Banking Group shares are on forward P/E ratios of eight to nine with dividend yields heading above 6%, and the recovering Royal Bank of Scotland commands a P/E of only around 11, just ahead of its expected recovery in earnings and dividends.

Building and retail

I’ve never really understood why the housebuilding sector has been so badly hit by Brexit. With the UK in the grip of a chronic housing shortage, I really don’t see any house price collapse. And even if there’s something of a fall, the housebuilders might make less short-term profit — but building land would also get cheaper.

My pick right now might be Taylor Wimpey, with dividend yields set to break 7% and the shares on a P/E of around 10. Alternatively, I like the look of Countryside Properties with modest yields of around 2.5% but growing rapidly.

The retail world has also been hit hard from the curtailing of economic growth and a fall in real-terms wages. Shares in high flyer NEXT have lost 35% in two years after its growth story has turned into one of predicted stagnation, and the hoped-for return to growth at Marks & Spencer is further delayed with the shares down 30% in the same period. Even Kingfisher has seen its shares shedding 15% in two years.

All of these shares would surely get a boost from a positive turn in the sorry EU saga and from the almost inevitable uptick in business confidence that would ensue.

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Alan Oscroft owns shares in Lloyds Banking Group. The Motley Fool UK has recommended Barclays 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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