BREXIT 3 SHARES TO BET ON
SHARE VIEWS ON: BLUE LABEL TELECOMS FAMOUS BRANDS TELKOM PPC
on 23 June, Britons will head to the polls to vote on whether or not they want to remain in the EU. There is much opinion out there on which way the vote will swing (see sidebars) and I for one certainly do not want to speculate on what the outcome of the referendum will be, even though for now it seems that most people are backing an “exit” vote. I do, however, want to look at what the potential impact would be on a selected number of shares listed on the both the JSE and the London Stock Exchange (LSE) in both the scenarios of an “exit” vote and a “remain” vote.
First, though, we need to look at the potential impact either outcome could have on Britain and the EU before we delve into specific companies. Should the British public vote to leave the EU, it is largely expected that Britain’s GDP will fall and that it would impact the labour market rather negatively, as well as lead to a weakening pound. It can also be expected that the euro will weaken somewhat as fears around the rest of the union breaking apart is likely to put pressure on its members’ economies. On the opposite end of the spectrum, should the British public decide to remain in the EU, we could see a reversal of the current pound and euro weakness.
At this stage a Brexit poses a rather large risk to not only European financial markets, but also to global financial markets. So much so that US Federal
Reserve chair Janet Yellen recently commented that it is one of the key risks to the global economy. Therefore developments in this arena need to be watched carefully and reacted to appropriately. The risk is that Brexit takes place and the fallout is felt by world markets at large. Capital & Counties (Capco) is a Real Estate Investment Trust (REIT) that is invested in three major, and rather exciting, properties in and around London. The share is listed on both the LSE as well as the JSE. The local listing has performed very well in recent years – it’s up 250% over the past five years – as the rand continuously lost ground against the pound, and the value of the underlying property portfolio keeps growing along with revenues generated from rental income. This has been an exciting share to own and investors have done well. Since the beginning of the year though, the share has been under a substantial amount of pressure (it currently trades nearly 30% down from its December levels of above R100), likely with some help of the fears surrounding the looming possible Brexit.
It is reasonable to expect that, should Brexit go
ahead, the share will come under even more pressure and head down to test a support level around the R56 mark. This will likely be fuelled by falling property prices in the UK, as well as a significant weakening in the pound. Thus the age-old double-whammy of falling net asset value (NAV) and the inverse of a rand-hedge effect. It is likely that should Brexit happen, Capco will suffer badly.
In the event that Brexit does not take place, it should be reasonable to expect that the pound will once again strengthen and that the rand-hedge effect will continue to bode well for Capco shareholders. I would imagine that should Brexit not take place, Capco could trade back up to its 2015 highs of around R95 to R100 a share. This is one of the heavyweights listed on the JSE. The company holds a lot of clout in our index due to its large market capitalisation and thus heavy weighting in our All Share and Top40 Index. It is also listed on the LSE and has an American Depository Receipt listed on the New York Stock Exchange (NYSE). As its name suggests, British American Tobacco (BAT) is in the cigarette business.
Again, this share – and investors who own it – has enjoyed the effects of the weakening rand for some time. (It has returned nearly 47% to shareholders over the past 12 months.) Should hard times befall the UK economy, people will keep smoking so there should really be no need to worry about revenue losses. Although, in the event of Brexit taking place, the randhedge effect will be reversed and BAT could, on our local exchange, find itself scrambling for support levels at around R810 a share. Not only will this make investors rather unhappy, but will put the Top40 Index under pressure (BAT’s weighting in the index is 4.5%.)
If Brexit does not take place, it would be reasonable to expect that the share
continues its slow grind higher and higher as it has been doing for the past several years.
Now we are looking at one of the true dual-listed heavyweights on the JSE. SABMiller holds a near 15% weighting on our Top40 Index, so we can expect that whatever happens to SABMiller will have a big impact on the rest of our local market. SABMiller is also listed on the LSE and again, enjoys all the benefits of being a rand-hedge stock. Let’s assume that the AB InBev/SABMiller merger deal goes through and that the deal takes place at £42 a share (which at the time of writing equalled roughly R909 a share). That means that given the weakening we have seen in the pound over the last few weeks caused by talks and fears of Brexit, it is already overvalued on the JSE (it closed at R935.57 a share on 7 June).
Should Brexit happen, and the pound drastically weaken, this £42 buyout for local shareholders becomes less and less attractive. The share will have to re-rate and will likely trade down to the R680 a share level where it was trading before the AB InBev/SABMiller merger negotiations started. Again, this would have a large impact on the JSE’s All Share Index.
Should Brexit not take place though, the pound could strengthen and the £42 price tag could once again offer some additional value for local shareholders.
As it stands now, it is anyone’s guess as to what is going to happen with regard to Brexit. We simply do not know. All we have to go by is the past, and in the past, Britons voted to keep the UK in the eurozone. Either way, investors should probably prepare for volatility and adjust their portfolios in such a way that they are at the very least hedged for either eventuality.
SABMiller holds a near 15% weighting on our Top40 Index, so we can expect whatever happens to SABMiller will have a mammoth impact on the rest of our local market.
Leopold Scholtz Historian and independent political commentator
Janet Yellen Chair of the US Federal Reserve