How Will the Brexit Transition Impact Consumer Staple Stocks?

Experts have varying opinions on how UK stocks are being impacted by the ongoing Brexit transition deal. On the surface, it seems like Brexit isn’t doing the UK stock market any favours. It has under-performed over the past several years, with the gap widening after the historic Brexit vote in 2016. This, in turn, has led to increased volatility for the pound.

However, the link between Brexit and the stock market has always been very complicated. Granted, UK stocks had a torrid start this year, as the FTSE 100 became the worst performing major European index in the first quarter of 2018. In June, the FTSE 100 recovered some of its losses.

One interesting observation though is that whenever the pound’s value dips, stocks rise, and vice versa. FXCM reported that the GBP rallied against the USD and Euro when the new Brexit transition deal was announced in March. This is because the deal more or less addressed the economic concerns involving the Brexit transition, putting to rest some uncertainties that many investors had been harbouring since the 2016 vote. The trading session that occurred right after the announcement saw a 0.7% gain for the pound against the Euro, and 0.9% against the USD.

This, however, was short-lived. The pound hit a seven-month low in June thanks to a vote on the new Brexit transition deal. On the other hand, the low pound coupled with political anxiety has given rise to record highs for UK’s blue-chip stocks. There were positive payouts in June for defence, drug, and oil stocks. The report noted that the weak pound against the dollar allowed investors to receive a higher dividend on their investments.

This situation is perhaps why many investors have decided to ignore the whole Brexit drama altogether. After all, British equities have outperformed the Euro over the past year. The global economy, high oil prices, and solid growth in earnings have raised confidence in UK stocks among investors. Currently, the country still lags behind Asia and the US in terms of technology stocks, but apart from that, the FTSE holds a good mix of sectors for international investors. The FTSE 10 for instance, has the highest weightage for oil (17%) and banks (13%).

Andrew Milligan of Aberdeen Standard Investments remarked on the different opportunities in the UK stock market, citing that there are interesting stocks to be had in technology-related sectors and internet spending sectors. Even though the UK has no major hardware producers or tech giants like Google and Amazon, you can still bank on UK-owned ecommerce companies like Boohoo and Just Eat. This is because these enterprises use technology to disrupt their industries, which could be a proxy to the sector.

On the other hand, Milligan suggests staying away from consumer staples, utilities, communications, and media for the time being. While they are traditionally the safest sectors to invest in, they now face threats from competitive or disruptive forces. Compared to tech, consumer staples lack growth opportunities. The Money Observer’s post echoes Milligan’s sentiments, in that the tech sector is a safer bet than consumer staples today. Consider that investors have two main anchor views on the consumer staples sector: comfort and familiarity. While the sector looks like the safe choice, note that management behaviour can affect companies, hence the uncertainty in results.

Technology has been outperforming consumer staples in a huge way. While UK tech stocks need to catch up to those of the US and Asia, there are still plenty of reasons for investors to feel optimistic. In hindsight, there are many safe havens here, since companies have different ways of making money. From health tech, fintech, artificial intelligence, and autonomous cars, the UK’s tech sector has a large impact on daily life and the economy. This is why investors are turning to it for long-term safety in the midst of Brexit. If investors still insist on consumer staples, Milligan advises turning to Asian equities.