Which UK equity sectors are best placed to weather Brexit volatility?

By Graham Spooner, Adrian Lowcock and Andrew Wilson.

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Jul 08, 2016

Graham Spooner, investment research analyst at The Share Centre

When markets are gripped with fear and uncertainty, investors often seek the safe haven of defensive sectors. Companies that fall into this category are attractive because they tend to be lower risk and can often offer a higher dividend yield, which is an added attraction in low interest rate environments.

The first of two sectors we believe could be in a position to ride out the volatility caused by the Brexit vote is the gas, water and utilities sector. Companies that fall within the sector provide essential, every day products, and it is viewed as a haven for income seekers. Although often regarded as being rather dull, the sector tends to outperform in difficult times as investors switch out of cyclicals and reinvest in companies with more defensive characteristics.

Next is the tobacco sector. Companies within the sector are heavily exposed to overseas markets, so they should benefit from weaker sterling. What is more, products such as E-cigarettes are gaining in popularity and helping to offset sales of more traditional tobacco products. The sector is traditionally considered one of the most defensive in the market, which makes it popular at times of volatility. It is also attractive for income seekers since tobacco companies have an ability to generate good levels of cash flow and can therefore generally provide investors with inflation-beating dividend growth and an above average yield.

Adrian Lowcock, head of investing at Axa Wealth

The biggest challenge is assessing what might change from where we are now. The outlook for the UK might improve over the next 12 months. Visibility of what to expect certainly cannot get any worse. However, I think the most likely scenario is the pound will continue to remain at these low levels, possibly going lower.

As such, over the next year I would focus on large companies where earnings are derived from overseas sales, particularly the US. This leads us to the sectors that have already performed well in the weeks following the result. In particular, I like pharmaceuticals and tobacco. Not only do these companies benefit from the weak pound, which will boost earnings in 2017 should the exchange rate remain at these levels, but their defensive characteristics and the dividends will protect them well in the event of further volatility, either from the UK or globally.

Gold remains attractive but as the rest of the world moves on from Brexit the price might give back some of its gains. That said, having around 5 per cent gold in your portfolio has served you well in recent months and weeks and I see no reason to adjust that weighting.

Andrew Wilson, head of investment at Towry

Investors will look to favour multinationals with minimal UK exposure focusing on consumer staples, such as beverages, tobacco and global brand names. They will be hunting down shares in companies with their costs in sterling and revenues in dollars, and divesting themselves of businesses with the opposite profile. Domestic businesses, more often found in the FTSE 250 mid-caps and among smaller companies, will be deemed less attractive and more vulnerable to any slowdown in the UK economy.

That said, there are plenty of high quality businesses in the bottom 10 per cent of the market based on market cap, which have been tarred by the same brush but may actually be attractive targets for overseas corporates looking to make acquisitions in “cheap pounds”.

The migration of investors to stable global businesses in the FTSE 100 does make sense. However, as with all “obvious” investment strategies it is likely to overshoot in due course. The key is to make sure you keep valuation on your side and sift through the debris from the ongoing challenges among mid- and small-cap stocks where the true bargains are likely be found.

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John 6 months ago

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John 6 months ago