What stocks could outperform after a no-deal Brexit?

A no-deal Brexit would threaten to disrupt many businesses, but what stocks could outperform the wider market?

Brexit 6

Top Brexit-proof stocks to watch

A no-deal Brexit is expected to impact most businesses one way or another. Some would see their supply chains disrupted by border checks. Others would see the cost of trading increase thanks to new tariffs. Certain sectors may struggle to find the materials and labour they rely on. Even those UK companies that focus on the domestic market will be affected by a weaker pound and the impact on the UK economy.

The threat of a no-deal Brexit at the end of 2020 has already weighed on the FTSE 100 this year, causing it to underperform global markets, and no-deal becoming a reality would only exacerbate that trend. You can read more about what a no-deal could mean for markets, including the FTSE 100 and the pound, here.

Still, a no-deal Brexit is more of a threat to some companies than others and there are some industries that are likely to be less affected by a messy divorce between the UK and the EU. Defensive stocks, overseas earners, miners and structural growth stocks are among those positioned to outperform the market in the event of a no-deal and able to withstand whatever the outcome on December 31.

Defensive stocks

Defensive stocks typically hold-up when the wider market falls. These tend to be companies that provide critical services or products that will remain in demand regardless of what is going on, and able to provide reliable income to investors when returns in the wider market come under pressure.

Water utilities like Pennon Group and United Utilities are examples of stocks that tend to attract investors seeking a port to weather a storm. Similarly, stocks like Primary Health Properties, which rents out critical healthcare properties, or funeral provider Dignity would also hold up well if turmoil hits the markets.

Sticking with healthcare, the big pharmaceutical stocks like AstraZeneca and GlaxoSmithKline are also good defensive options. Although there are concerns about how the supply of medicines will work in a post-Brexit world, Big Pharma ultimately sells vital products that no-one can do without and operate on a truly global scale.

Overseas earners and global stocks

One consequence of a no-deal Brexit would be the collapse of the pound, which would negatively-impact most businesses that trade in sterling. For example, one consequence would be reduced purchasing power when UK companies source goods or services from overseas, pushing up costs that may have to be passed on to consumers in the form of higher prices.  

However, London is home to some of the largest and best-known companies in the world. In fact, the vast majority of companies in the FTSE 100 generate sales in other currencies. Only 29% of all revenue generated by the constituents of the index is in sterling, according to Schroders.

If sterling plunges as expected in the event of a no-deal, this will benefit those stocks that make their earnings overseas. This is because their earnings receive a boost when they are converted into weaker sterling.

The stocks best positioned in this regard are ones who make most of their sales abroad, as well as those that operate on a global scale and have exposure to other markets that can help offset any disruption that spawns from a no-deal.

For example, alcoholic drinks giant Diageo makes over 78% of its revenue outside the UK and the Europe and growth is geared toward emerging markets, while British American Tobacco also makes most of its money outside of Europe and has the added benefit of selling an addictive product.

Other overseas earners to consider include plumbing and heating product maker Ferguson, which makes 99% of its profits from the US and Canada with just 1% coming from the UK, and Craneware, which operates exclusively in the US healthcare market (but reports in dollars).

Commodity giants

Miners like Rio Tinto, BHP, Anglo American and Glencore are also likely to weather any volatility in the markets caused by a no-deal because their performance is linked to commodity prices, which react to global demand and supply. The only thing to consider is how the dollar performs post-Brexit as most commodities are priced in dollars, meaning a stronger greenback tends to weigh on prices whilst a weaker one boosts them. Still, the fact they report in dollars also means they are shielded from any fluctuations in the pound.

Gold miners such as Fresnillo could also appeal as safer equities in the event of a no-deal.

Structural growth stocks

There are some sectors that are poised to keep growing regardless of Brexit because they operate in a sector that will continue to expand no matter what happens.

One example would be waste-management company Biffa. The strong fundamentals of its market will remain largely unchanged by a no-deal considering it provides a vital service disposing of waste - and that will only increase as populations grow.

Technology stocks also tend to outperform the wider market when it is falling. London is not known for hosting too many international tech stocks but there is a handful to consider. Top of the list is The Hut Group, which has risen to 700p since listing at 500p in September, demonstrating there is huge confidence in the stock despite the uncertainty over Brexit. The share prices of other tech companies like Softcat, GB Group and Ocado have also outperformed the wider market during the pandemic this year, showing they can perform well at the worst of times.

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