Following Brexit, the UK economy’s outlook has become much more uncertain. This doesn’t mean a recession is inevitable, but it does mean investors may want to seek out a wider margin of safety when investing in UK-focused stocks. That’s because there’s a higher chance of downgrades to forecasts that could negatively impact on their share prices.
One company that could be hurt by a slowdown in the UK is Sainsbury’s (LSE: SBRY). It lacks international exposure and so a challenging economic period in the UK could cause a downgrade to its earnings outlook. In fact, the credit crunch showed that during a period of disappointing wider economic performance, many shoppers sought out no-frills operators such as Aldi and Lidl, with Sainsbury’s and other mid-market operators losing out.
While there’s no guiarantee that this situation will be repeated, Sainsbury’s share price could underperform in the meantime as investors become nervous regarding the prospects for UK consumers changing their shopping habits (again). However, since Sainsbury’s trades on a price-to-earnings (P/E) ratio of just 11.3, future problems appear to be priced-in. And its acquisition of Home Retail could lead to synergies that help support its growth, thereby making it a sound long-term buy.
Sound income stock
Similarly, Royal Mail (LSE: RMG) is highly dependent on the UK economy. Unlike Sainsbury’s though, Royal Mail has a European division that’s currently performing well. And although there’s scope for a slowdown in Europe as the effects of Brexit are unlikely to be solely confined to the UK economy, Royal Mail offers a wide margin of safety as well as excellent income prospects.
For example, it trades on a P/E ratio of 11.9 and with positive growth forecast in its bottom line for each of the next two years, it could continue to outperform the FTSE 100 as it has done by 7% since the start of the year. Furthermore, Royal Mail has a yield of 4.6% and having raised dividends per share at an annualised rate of 4.8% during the last three years, it remains a sound income stock. Due to the prospect of falling interest rates, this reliable income appeal could act as a positive catalyst and push Royal Mail shares even higher.
Short-term issues
Meanwhile, BT (LSE: BT-A) is also UK-focused and added to the uncertainty that currently brings with it is its ambitious expansion programme. This, of course, has included the acquisition of EE as well as major investment in its pay-TV offering and in its superfast broadband network. In tandem with this investment, BT has also slashed prices to increase its customers number. Although this will provide it with the scope to cross-sell products in a quad-play world, it also means that BT’s margins are likely to come under a degree of pressure.
In fact, BT’s earnings are forecast to fall by 10% this year. Although positive growth is forecast for next year, investor sentiment could decline in the meantime. This means that while BT could deliver strong profit growth in the coming years, for now there appear to be better options available elsewhere.