A no deal Brexit, or commonly known as a disorderly Brexit, would be the worst-case scenario for equity markets and will most likely lead to devastating events to the UK economy.
The UK parliament vote on the deal has been postponed giving rise to more speculation and confusion. All this has sparked back the fear that the possibility of a No Deal or Hard Brexit is still on the cards.
In such scenario, which are the UK sectors most likely to get hit?
The car industry would most likely lose the most due to it being highly integrated with the EU, with Germany being the top importer of UK cars and auto-parts. Auto firms will most probably be heavily affected by the WTO tariffs which the UK will now be imposed to as being a 3rd country out of the bloc.
Uk-based airlines will have to rethink their European routes in order to keep in line with EU laws and regulations. They will also have to recalculate fares and routes, taking into account cost of visas.
Uk-based low cost airline EasyJet share price dropped over 20% following the Brexit vote and has since discussed moving its headquarters overseas to an EU country.
A lot of UK-based pharmaceutical companies carry out their research and business overseas, which could cause logistical issues in the long term. However, the biggest uncertainty facing the industry is the impact on the regulatory processes and market authorisation of drugs in the UK.
The EU’s authorisation allows for the early approval of some drugs, providing faster access than the UK’s own process would.
UK banks are also likely to suffer especially those who are into investment banking. Banks are however in better shape when compared to 2008 and hence the turmoil should be sustained.
Food chains like Sainsburys and Tesco are also likely to face headwinds as they will have a difficult time to pass cost pressures to their consumers.
Aerospace and Defence
These companies (e.g. Airbus, Rolls-Royce) are set to suffer, at least in the short term, as companies try to move their production out of the UK. They might also suffer when firms try to co-operate with other EU member states on military programmes.
Who stands to gain?
With a weaker pound, companies which are more geographically diverse with UK representing less than 5% of their total revenue stand to gain (e.g. Unilever).
Furthermore, weaker pound will be very beneficial to firms that compete for sales domestically with foreign importers (e.g. UK based holiday operators Center Parcs benefit from a weak pound as UK customers find it cheaper to use GBP at home by staying in the UK rather than travelling abroad)
Large cap companies, which are part of the FTSE 100, more often than not have the majority of their earnings coming from outside the UK. This means that each time the pound weakens, these companies will report higher earnings in Sterling. (e.g. Carnival Cruises, HSBC, AstraZeneca, Diageo and others).
This is very much highlighted if we compare the performance of the FTSE 100 against the GPBUSD cross. As we can see from the chart, in several cases as the pound was gaining, so did the FTSE 100 and vice versa when the pound was losing ground.
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