Stock Picks in a Post-Brexit World

Well, now they’ve done it: the UK public voted itself out of the European Union in late June. After it invokes Article 50 of the EU Charter, the UK has two years to renegotiate its trade deals and treaties as best it can. One can expect clemency to be neither asked of, nor given by, the remaining 27 member states. If these deals cannot be wrapped up in two years, only a “yes” vote by all 27 to extend the deadline will give the UK more time. (Fat chance.)

So, what is the cost of all this? What does the UK have in store for itself post-brexit? An estimated loss of 2 percent of GDP in 2017, for starters. “In April, the EY Item Club, a forecasting group that uses Treasury modeling said the UK’s GDP would grow by 2.6% in 2017 — a figure it now expects to be barely 0.4%. It expects the pound to have fallen 15% in a year by the end of 2016, and decline further through the decade.”

The UK’s Guardian newspaper also quoted Peter Spencer, chief economic adviser at Item, saying that, “Longer-term, the UK may have to adjust to a permanent reduction in the size of the economy.” Some observers set the damage at a loss of 100 million pounds and almost a million jobs.

But doesn’t the weaker pound help UK exports? Yes, it does, but not enough. The situation facing the UK looks bleak ― and also puts tremendous stress on the global economy. Consider the stock market declines elsewhere in the world after the Brexit vote. Markets in the US and in some other countries are at their all-time highs.

Funny thing, though: “Historically, when there have been market shocks since World War II, … the [US] market goes down 6% to 8% in a one-week period and then only takes about two weeks to get back to break-even,”says Sam Stovall of S&P Global Market Intelligence in a recent Yahoo Finance video. We have, in fact, seen a resurgence, which speaks to the underlying resilience of the US economy.

In any case, is it time for a massive garage sale of UK assets? Maybe. Some investors and mergers-and-acquisitions bystanders are getting involved. Case in point: Anheuser-Busch InBev’s sweetened offer (up to $59 per share) for London-based SABMiller. This caught the attention of the New York Times, which also commented: “In the weeks since the ‘Brexit’ vote, a Chinese conglomerate has bought a London-based movie theater operator and a Japanese Internet giant has acquired a British semiconductor designer.”

Per the SABMiller offer, alcohol seems to be one of the market flashpoints at present, and not just UK-based brewers and distillers. Fortune, noting the investment strategy of billionaire value investor Mario Gabelli (CEO of Gamco Investors), quoted him as telling CNBC this: “If you can find [an attractive stock] in the UK, that is located in the UK, their expenses are within the UK, and they sell something in [the] US country, [you] get the translation benefit. I … like companies that have pricing power that can do well in a global marketplace.”

Therefore, Gabelli has been buying $65 billion liquor giant Diageo (DEO 0.90%) and Davide Campari Milano (DVDCY -0.20%), a $5.2 billion Italian beverage maker. “Both stocks took a hit following the Brexit vote, dropping 4% and 4.4% respectively,” the Fortune article noted.

S&P Global Market Intelligence’s Stovall also sees enticing opportunities in a post-Brexit world, recommending “small- and mid-cap US stocks, dividend aristocrats, and gold stocks.” Frankly, just the fact that we are talking about good long-term investments is, in itself, refreshing. Yes, Brexit happened. Yes, the UK’s future doesn’t look so good post-Brexit. But the world goes on―and savvy investing, even in cherry-picked UK stocks, is alive and well.

Written by Ali Bakir

Co-Founder and Director of Business Development at Peeptrade