Brexit is perhaps the greatest change to happen to the British economy since the end of the Second World War. It’s a change that will define this decade, like Watergate and Vietnam in the 1970s, and the fall of the Berlin Wall and the miners’ strike in the 1980s.
Investors grappling with the new reality of Brexit will be wondering just which shares to buy into, and which to avoid. So, in this article, I’ll take a big picture view of all the sectors, to understand what will do well and what will do badly in the FTSE 100 (INDEXFTSE: UKX).
These are the key trends
The pound has fallen sharply since the referendum result, and this means that exporters will do well. A weak pound will mean the environment is a little more inflationary than we might otherwise expect. However, I expect the Bank of England to keep interest rates at 0.5% for the foreseeable future.
Companies that do much of their business in continental Europe will be considering whether to move some of their operations from the UK to other European countries. Other companies will reduce their hiring programmes. And the rate of business investment may slow.
That will mean the rate of job creation in the UK will slow. However, I think Britain will continue to have the highest level of employment of any major nation on this planet. For many firms, it will be business as usual.
The GDP growth rate will also slow, but I think warnings of a forthcoming recession are overblown. If unemployment starts to rise, QE can be resumed. What’s more, the deflationary effect of a worsening jobs and growth outlook may counterbalance the inflationary effect of a falling pound.
Immigration will fall, though perhaps not as much as we think, and not for a while yet. This will slow the housing boom, but it won’t bring it to a halt. Remember that much of the immigration to the UK is from outside the EU.
How will individual sectors fare?
OK, so what about individual sectors? Well, let’s start will the housebuilders like Barratt Developments. These have fallen back sharply in recent days, but I think these falls have been overdone, and would expect a gradual recovery.
What about defence companies? Exporters such as BAE Systems should benefit because of the weaker pound. Other exporters that will benefit are consumer goods firms such as Reckitt Benckiser and fashion retailers like SuperGroup, although the latter’s sourcing costs could be pushed up.
As for supermarkets like Tesco, they’ll find that prices will be forced up because of the weak pound, and consumer demand won’t increase as much as expected. So the supermarket squeeze will continue, and this remains a sector to be avoided.
If we consider oil companies like BP, a weaker pound will mean more expensive petrol in the UK’s service stations, but the long-running theme of a commodities bust will mean oil, gas and mining businesses should still be avoided.
Finally, banks such as Lloyds have taken a battering. But I expect them to gradually recover.