- Retail companies could also suffer if consumer sentiment sours
- Energy, materials, beverages and tobacco stocks may benefit
Financial firms in the FTSE 100 have seen a stellar rebound since the U.K. market’s low two months ago. But to UBS Group AG’s wealth-management unit, they’re the ones that stand to lose the most if the nation leaves the European Union.
Secession by Britain would hurt both national and international operations of financial institutions: those most tied to the domestic economy would suffer because leaving the EU could hamper the economy, while any change in the U.K.’s credit rating would push up funding expenses. Larger banks would be hit by an increase in costs arising from the greater risk attached to their British assets, and potentially more onerous rules for providing services in the EU, according to UBS.
“The domestic banks are very linked to the U.K. economy as it is all about consumer lending and business lending,” said Caroline Simmons, the deputy head of U.K. Investment at UBS Wealth Management in London, without mentioning any specific stocks. The unit has about 31.7 billion pounds ($45 billion) of assets under management. “They would be more heavily impacted than international banks due to their larger exposure to the U.K. property market and to business capex spending. But if we see widening credit spreads in the U.K., it would be bad for all banks.”
Even as polls signal the June 23 referendum is too close to call, U.K. stocks have maintained the best performance among major western-European markets in 2016, and last week entered positive territory for the year thanks to a weakening pound and the rebound in energy and commodity producers. British lenders, in contrast, are still down about 15 percent this year, amid volatility almost twice that of the broader market, on concern that central-bank stimulus will hurt profits and low interest rates will squeeze margins.
UBS Global Research is not the only one warning of the risks associated with financial stocks -- Morgan Stanley is recommending an underweight position due to the potential fallout of Britain leaving the EU. In a report dated April 6, it warned that Brexit concerns will “likely” intensify through the second quarter.
On the flip side, some companies could prosper from a U.K. exit. Energy and commodity producers stand to extend gains, along with beverage and tobacco companies, according to Simmons, who cited the benefits of a weaker pound and their lower exposure to the domestic economy. Companies that generate the most revenue in the U.S. would suffer the least as they would remain relatively insulated from any economic slowdown in the U.K., Simmons said.
If U.K. voters choose to stay in the EU, the a research report by UBS advises buying small caps and domestically focused companies including housebuilders, retail, and real estate, as well as those stocks that declined on concerns of an exit. In the event of a vote in favor of leaving, it recommends large-cap internationals.
Losers in case of Brexit (according to UBS Global Research):
* Banks: Lloyds Banking Group Plc, Royal Bank of Scotland Group Plc and Barclays Plc may face higher costs and tighter credit conditions.
* Retail-related companies: J Sainsbury Plc, Debenhams Plc and Restaurant Group Plc could lose as economic uncertainty damages consumer sentiment.
Winners in case of Brexit (according to UBS Global Research):
* Tobacco and beverage companies: Imperial Brands Plc and Diageo Plc could benefit from a weaker pound and their limited exposure to the U.K. economy.
*Telecom companies: Vodafone Group Plc and Inmarsat Plc may gain from a weaker currency as much of their earnings are denominated in euros and dollars, respectively.