Picking The Brexit Winners




Picking The Brexit Winners



■ Post-Brexit vote, the Pound and Euro have started to depreciate against the US$.
■ We chose from our coverage, stocks with no Euro and Pound exposure and/or US$
revenues, or those with no foreign currency exposure whatsoever.
■ Winners came from the finance, utilities, construction, glove, property,
transportation, technology and small-cap sectors.
■ Investors can also take refuge in dividend-yielding companies, especially REITs.
■ Malaysian stock market is largely unaffected by the immediate Brexit impact.
The Pound and Euro expected to remain weak relative to the US$
The equity markets worldwide dipped post-Brexit vote on Friday 23 Jun and we expect further weakness as world equity markets grapple with the uncertainties surrounding contagion risks. As such, currency markets are likely to see weakness in the Pound and Euro persist. Brexit may set precedence for more ‘referendums’ in Europe, including reigniting the Scottish independence movement.

Picking stocks with no Euro and Pound exposure

Gold and the US$ seemingly benefited, as traders scurried to seek safety and even the Yen rose to a new high. In our coverage universe of 133 stocks, we screened for companies with no Euro and Pound exposure and/or US$ revenues, as well as those with no foreign currency exposure whatsoever. We came up with a list of 34 companies.

Winners came from several sectors that are Ringgit dependent

Winners came from the finance, utilities, construction, glove, property, transport, technology and small-cap sectors. The other sectors, such as plantations, auto, consumer and healthcare, faced neutral to negative impact. The most secure sectors had the majority of earnings come from Malaysia and costs that are largely Ringgit denominated. Our top large-cap sectors are still construction and finance.

REITS and dividend yielders offer protection and returns

Given the negative outlook post-Brexit, interest rate hikes are likely to be delayed for now. As such, we believe the REIT sector also offers investors’ portfolios some protection. We performed a scan of the top dividend-yielding companies in our coverage and the top five were: UOA Development (7.1%), YTL Power (6.8%), Maybank (6.4%), YTL Corp (6.3%), LBS Bina (6.0%) and Axis REIT (5.5%). A detailed list is foundoverleaf.

Risks to our recommendations

Risks to our recommendations are: 1) the contagion effect spreads across the EU and more countries seek to exit, causing major currencies, including the US$, to tumble further. This would affect our selection of companies that are net US$ earners, 2) the economic slowdown spreads globally, which could cause demand for goods and services to weaken in Malaysia, 3) crude oil prices fall below US$35/bbl, negatively affecting Malaysia’s GDP forecasts.
brexit winner shares

Picking the Brexit winners

Malaysian Companies with no Euro or Pound exposure

Gold and the US$ seemingly benefited – so US$ revenue generators were also picked
Among the asset classes, gold and the US$ seemingly benefited as traders scurried to seek safety and even the Yen rose to a new high. In our coverage universe of 133 stocks, we screened for companies with no Euro and Pound exposure and/or US$ revenues, as well as those with no foreign currency exposure whatsoever. We came up with a list of 34 companies.
Winners came from finance, utilities, construction, glove, property, transport, technology and small-cap sectors. The other sectors, such as plantations, auto, consumer and healthcare faced neutral to negative impact. The most secure sectors had the majority of earnings come from Malaysia and costs that are largely Ringgit denominated. Many of the small-cap companies fit this profile. Our top large-cap sectors are still construction and finance.
brexit winner stock pick

REITs and dividend-yielders offer protection

Apart from property/REITs, our picks came mostly from utilities, construction and consumer sectors
Given the negative outlook post-Brexit, we believe that most developed and emerging markets are likely to delay interest rate hikes, at least until the currency volatility dissipates. As such, we believe the REIT sector offers investors’ portfolios some protection. We performed a scan of the top dividendyielding companies under our coverage and the top five were: UOA Development (7.1%), YTL Power (6.8%), Maybank (6.4%), YTL Corp (6.3%),LBS Bina (6.0%) and Axis REIT (5.5%). A detailed list is found below (Figure 3)
Figure 3: Malaysia’s Top Dividend Yield Company
malaysia top divident stocks

Risks to our recommendations

For now, most risks are from external sources but this could change if global slowdown occurs.
Risks to our recommendations are mainly downside risks:
(1) The contagion effect spreads across the EU and more countries seek to exit,causing major currencies, including the US$, to tumble furtherl. This would affect our selection of companies that are net US$ earners; (2) The economic slowdown spreads globally, which could cause demand for goods and services to weaken in Malaysia;(3) Crude oil prices fall below US$35/bbl, negatively affecting Malaysia’s GDPgrowth forecasts and therefore, demand for goods.
source: CIM Research – 26/06/2016
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