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“Brexit”/ “Brexin”

As everyone is aware the UK will vote on EU membership on the 23rd June 2016 with the results the following day.

We don’t know the result, no-one does. The bookies are offering 2/5 on “Remain” “Brexin” and 2/1 for “Leave”, “Brexit”.

http://www.oddschecker.com/politics/british-politics/eu-referendum/referendum-on-eu-membership-result

The polling data has varied wildly. The “Remain camp” enjoyed a week long surges in response to President Obama, the “Leave” camp responded well to 2015 UK net migration data from the Office of National Statistics and the Gove speech on Sky News.

The persistently high percentage of “DK” (don’t knows)/ abstentions is a worrying sign, as is the strong evidence of a “generation gap” with younger urban dwellers more EU positive than gentrified older generations. A problem for “Remain” is their younger voters’ turnout is less reliable that the “Leave” camp.

Referendums are binary in nature and they are bad news for markets. As our PM has disclosed, he owns no shares and this makes sense given his preference for referendums. The Scottish referendum saw weeks of uncertainty in the run-up to the vote and about one day worth of rally post vote. The Scottish property market ground to a halt ahead of the vote. The EU referendum is similar, if we vote to “Remain” there will be a one day rally worth maybe 100-150 points largely because with “Remain” nothing changes. If there is a “Leave” there is possibly a 300-400 point downside and significant political uncertainty ahead. Referendums are bad risks.

Which companies are sensitive to the outcomes? We are not recommending these as immediate buys or sells. We are suggesting that these companies over this critical period may be more volatile.

a) “Remain” sensitives ie remaining in the UK will positively impact business.

Company Revenue Currency Sector Reasoning Px. Target (p)
Berkeley Grp STG Property ↑ demand for £1m+ flats 3300
IAG EUR Airlines ↑ £ hence more UK travel 550
Land Securities STG Property ↑unblocking of commercial property M&A 1200
Lookers STG Autos ↓€ ↑£ so cheap EU imports 145
Persimmon STG Property ↑ demand for £1m+ houses 2100
Savills STG Property ↑ volumes in London 800
TUI EUR Leisure ↑£ ↑demand for EU holidays 1100
Thomas Cook STG Leisure ↑£ ↑demand for EU holidays 75

“Indifferent” ie have a) UK business is small relative to global operations/ no direct business impact – (this is not to say there will be zero short- term impact) b) takeover completion is near c) profits mainly derived in the USA.

Company Revenue Currency Sector Reasoning Px.Target (p)
BHP Billiton USD Mining Near zero exposure to UK 1000
Carnival Corp USD Leisure Primarily US based 3500
Coca Cola HBC EUR Packaging EU based business 1500
Dignity STG Services No impact on funerals 2500
GSK USD Pharma Global business, little impact 1400
Inmarsat USD Telecoms Marine “satcom” no impact 800
Mediclinic STG Hospitals SA/UAE business no impact 900
Mondi EUR Packaging SA/ EU main area of business 1300
Old Mutual STG Insurance 2018 demerger on track 200
SAB Miller USD Beverages £44 ps cash+$0.9375 div 4465

“Leave” consist primarily of a) companies that will benefit from a weaker sterling against other currencies because business is mostly based ex-UK or b) Unhedged overseas asset base.

Company Revenue Currency Sector Reasoning Px.Target (p)
Diageo STG Beverages ↓£ lifts US/EU/RoW profit 1850
First Group STG Transport ↓£ lifts US based First Student 105
ICAP STG Finance ↑volatility in Treasuries 430
JPM America STG Inv. Trust ↓£/ $; trust is USD assets 300
JPM Japan STG Inv. Trust ↓ £/¥ ; trust is Yen assets 350
RSA STG Insurance ↓£ lifts Canada/EU profit 475
PZ Cussons STG Healthcare ↓£ boosts Nigeria/US/Asia 320

Conclusion

Just to clarify we are saying the above companies either have sensitivity to “Remain” or little or no sensitivity or will benefit from a “Leave” result.

We are also concerned about a very narrow, marginal result (<1% difference) that would pressure the government to hold another referendum at a later stage in this Parliament.

It is an old adage that markets “climb a wall of worry” – we have had investor concerns over the risks related to “Brexit” for over six months. People rightly yearn for a UK when elected governments made the major decisions rather than bouncing them back to the electorate. Maybe there will be a referendum over the Heathrow airport extensions?

By mid-July the EU vote will be “water under the bridge” and investors will have found other issues to focus on such as the path for higher US interest rates and the US Presidential Election in November 2016.

Maybe the real issue is the slowdown in global GDP and the impact of the apparent backfiring of central bank asset purchase programmes (let’s leave that for another day)!

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