Brexit on ASX with the day almost there!

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Australian Economy, UK Economy, Uncategorized

Global markets have been in turmoil ahead of Brexit outcome. The assassination of British Member of Parliament, Jo Cox, a lawmaker for the opposition Labor Party and a vocal backer for Britain would continue with European Union led to even more restlessness among global investors. Both ‘remain’ and ‘leave’ campaigns were said to be suspended post this tragic incidence; however, this may turn momentum in favor of the ‘remain’. Last week, Chancellor George Osbourne also revealed about the emergency budget of $60 billion to cater to any economic shocks owing to the Brexit.

Amidst the entire scenario, the S&P 500 (INDEXSP: .INX) and Dow Jones Industrial Average 2 Minute (INDEXDJX: .DJI) fell over 1.2% and 1.1%, respectively, during the last five days (as of June 17, 2016). S&P/ASX 200 (INDEXASX: XJO) plunged over 1.21% in the last five days (as of June 20, 2016). There are recent reports from High Commissioner to the UK, Alexander Downer who has raised a concern that Australia may bear the Brexit brunt on its $10 billion trade relationship with the UK with the uncertainty if Britain votes to leave the European Union (EU).

The growing uncertainty of the referendum outcome is thus creating a sense of panic among the global as well as Australian investors as Britain is the third major economy in Europe and fifth major economy in the world. Deutsche Bank analysts believe a Brexit vote would reduce the UK GDP growth to 1% or even below as compared to the present 2% level. Analysts forecast the sterling to fall in the range of 10-20% impacted by the reducing capital inflows. Deutsche Bank analysts expect UK-listed shares to drop over 15%.

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Polling Movement (Source: Financial Times)

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Stocks with potential impact

ASX listed stocks having an exposure in UK would have an impact in case of Brexit and accordingly investors need to be cautious ahead of this outcome. Some of the stocks with UK exposure to watch are:

  • CYBG PLC (ASX: CYB) that demerged their business from National Australia Bank and has high exposure to UK business. The stock surged over 30.3% since its demerging of its business due to better than estimated performance and analysts upbeat expectation on the stock. On the other hand, the stock has been correcting over 1.6% in the last five days (as of June 20, 2016) ahead of Brexit outcome and in case of Brexit, there could be more correction in the stock.
  • BT Investment has been correcting in the last six months and has exposure in UK via its BTIM UK Limited and hence the stock could face challenges in this week. Even Henderson Group plc (ASX: HGG) also witnessed a hit last week.
  • QBE Insurance Group Ltd (ASX: QBE) has 43% GWP in UK and Ireland as well as 21% of GWP is contributed from the other Europe markets. Having such a strong exposure in the UK markets, the stock has been under pressure in the last four weeks.

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QBE’s core exposure in the UK markets (Source: Company Reports)

  • Australia and New Zealand Banking Group (ASX: ANZ) stock has been under pressure in last three months and fell over 8.45% (as of June 20, 2016). Despite concerns over the overall group’s performance, Brexit fears have also been impacting the stock as the bank has 23% of its portfolio in UK & Europe.

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ANZ exposure to the UK and Europe markets (Source: Company Reports)

  • Among other stocks, Westfield Corp Ltd (ASX: WFD) and Iress Ltd (ASX: IRE) also have their exposure to UK and are expected to react this week based on Brexit decision. GBST Holdings Limited (ASX: GBT) fell over 3.88% in the last five days (as of June 20, 2016) as they have strong client base in UK, which grew to 12 as of 2016 from 5 in 2014. Meanwhile, 3P Learning Ltd (ASX: 3PL) stock plunged over 41.8% in the last four weeks due to their lower than estimated forecasts, and stock might be under pressure in the coming week.
  • Computershare Limited (ASX: CPU) stock might also face challenges in the coming days as the group has a decent exposure in the UK markets. Moreover, the group has given weak full-year 2016 guidance with EPS to be 7.5% lower against fiscal year of 2015 results. Even Flight Centre Travel Group Ltd (ASX: FLT) stock fell over 25.8% in the three months (as of June 20, 2016) as management has issued an unfavorable outlook and commented that they might not achieve their targeted 4% to 8% underlying PBT growth for fiscal year of 2016. On the other hand, we believe the stock is still a hold given the management’s solid growth efforts and other fundamentals, while it seems to have only moderate impact from Brexit.

In a nutshell, Australian companies such as the banks based in the UK do see some haziness considering operations from UK into Europe if Brexit proceeds. Further, the impact on Australians living and working in the UK is yet not clear. On the other hand, there exist a good possibility of UK staying in the EU based on latest market speculations as at June 20, 2016. This correlates to the strong start to the week with banks and resources resulting into a broad ASX relief rally. Sterling jumped to a high level against dollar post the poll taken on Friday. The move can be either ways which will be decided on coming Thursday.

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