Which stocks could be worst hit if Britain votes to leave the EU?

As Britons face one of the biggest political decisions in a generation, the focus of the campaign has been largely based on the economy. Will a Brexit lead to slower growth, or even a recession? Both sides have strong economic arguments, but few would argue that there could be a shock for some sectors in the event of a Leave vote.

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Sector Exposure

 

The key sectors identified by Goldman Sachs in a recent note to clients were banking, property, household goods and life insurance. It’s based this on the correlation of earnings with UK domestic demand growth over recent years.

There is definite anxiety around financials as a vote to leave the EU could seriously dent London’s claim as Europe’s financial capital. At the crux of the debate is the issue of ‘passporting’, which lets financial services firms sell their wares in each of the EU’s 28 member states without separate regulatory approval or the need to set up foreign subsidiaries.

In the event of a Brexit, banks and fund managers based in the UK could be forced to relocate their operations to gain access to the EU market. A PwC report from April argued that access to the EU was vital for Britain’s financial sector and estimated up to 100,000 jobs in financial services could be lost in the event of a Brexit.

Banks reliant on mortgage lending may also feel the effects of Brexit if house prices slide as much as some commentators are predicting.

In property, there have been clear signs that investors are delaying decisions until after the vote. Several economists have warned that house prices could fall significantly if Britain leaves. However, the predicted drop in sterling could make UK property more attractive to investors and support demand.

Across the board, Goldman’s worst case scenario is for earnings at FTSE 100 companies to fall 13%, while earnings among the most domestically-focused FTSE 250 companies could be down 18%. It is worth noting that the largely internationally-focused FTSE 100 could see some uplift to earnings from a weak pound, which most expect to fall if Britain votes out.

Top Stocks to Watch

 

Goldman’s list of the most-affected stocks is heavily weighted to the household goods & home construction sector.

It includes Travis Perkins, Bovis Homes, Persimmon, Intu Properties, Barratt Developments, Bellway Homes, Berkeley Group, Redrow Homes, Great Portland Estates and Land Securities.

Further down, Shaftesbury, British Land, Go-Ahead, Greene King,JD Wetherspoon, Taylor Wimpey, Next, Ted Baker, Legal & General and William Hill are among the stocks that could be affected by a leave vote.

To this we’d add a few more in the financial services and travel sectors that could see big swings:

Barclays – shares are off about 10% since hitting a three-month high in late May. The bank has pulled out of Africa as it sees its future in the UK. A Brexit vote could damage this ambition. In February SocGen analysts warned of higher funding costs for UK banks in the event of Brexit, singling out Barclays and Royal Bank of Scotland as the most exposed.

HSBC – The Asia-focused bank is also down around a tenth since April and is now worth half its 2013 high. HSBC has been flirting with moving its headquarters out of London for some time – it may stop teasing us if Britons vote out.

IAG – Although Willie Walsh says Brexit won’t materially impact the firm, the British Airways owner listed worries about the referendum as a chief concern when it reported weaker second quarter sales. For airlines the vote is huge as the EU’s single aviation area makes it easy for UK-based carriers to operate in each country. Removing this form of passporting could be huge for IAG, which also owns Aer Lingus, Iberia and Vueling.

EasyJet – The airline may swiftly relocate its business and has already drawn up contingency plans for a Brexit. Its stock is down sharply after raising the dividend in May. Terror threats, higher oil prices and waning demand mean it’s not plain sailing for airlines and easyJet’s share price could be one to watch.

LSE – Its mega merger with Deutsche Boerse could end up in tatters if Britain leaves. At present the plan is for the merged company to be headquartered in London, but this seems unlikely if the UK is no longer in the EU.


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