Brexit stocks: quack remedy

Despite flourishing within the UK’s body politic years ago, the Brexit virus has only recently infected the country’s currency. Since the referendum vote, the pound has deteriorated by 18 per cent versus the dollar. For domestic-listed companies, however, relief has come in the form of overseas earnings. The efficacy of the panacea is eroding.

The UK government is about to trigger Article 50, initiating the process for separation from Europe. One could reasonably expect the pound to stay weak and UK companies with foreign revenues to benefit. Such a diagnosis would be overly hasty.

Yes, some London-listed companies with substantial overseas revenues have had a good run. Plumbing supplier Wolseley earns two-thirds of its revenues from the US, and almost all of its trading profits. Its shares are up a quarter in the past year. Things are going so well it has decided to adopt its US subsidiary’s name, Ferguson.

That is unlikely to occur at Berendsen, the FTSE 250 workwear specialist. Even though more than half of its sales come from overseas, legacy problems in its UK business are compounded by the prospect of fewer foreign workers wearing their uniforms. Its shares are off over a third since October.

In fact, only a minority of the FTSE 100 or FTSE 250 companies that source more than 40 per cent of sales from the US and Europe have outperformed these indices, according to S&P Capital IQ data. Of course, there are multiple factors that drive earnings. What is clear, though, is that any currency boost to companies stemming from Brexit concerns, or the parlous state of UK finances, is not consistently making a difference to shares.

More consideration should be given to what happens if Brexit’s biggest fan across the pond, President Donald Trump, keeps struggling to pass his legislative agenda in Congress. The US market’s movement has historically correlated positively with the FTSE. Moves in the S&P 500 explain about 60 per cent of those in the FTSE 100 or the 250 indices over the past five years.

True to stereotype, when the US economy sneezes, the UK (and the rest of the world) is likely to catch a cold. Investors would do better to build up their resistance to the end of the US bull market. Trying to pick out Brexit winners in the UK is a patent remedy that does not work.

Lex welcomes discussion with readers. Do you share our scepticism over the safe haven status of UK stocks in the wake of the Brexit vote? Please let us know in the comments field below.