"A third of the UK economy is related to exports, but that is not the case for UK-listed companies," says Simon Gergel, fund manager of The Merchants Trust (MRCH). "Vodafone (VOD) is not a trader."
Gergel dispels the idea that UK companies will be adversely impacted by Brexit, that is, at least, not the ones listed on the UK stock exchange.
“Looking at the industries most likely to be affected by Brexit; we have no quoted agriculture firms in the UK, no listed car manufacturers, airlines are vulnerable they have specific issues but the big players in aerospace are mostly in the US and Saudi. I don’t see Brexit being a big problem for BAE Systems (BA.).”
Gergel gives the example of a UK-listed company he recently met with; “We visited a £1 billion company the other day. It only relies on Europe for 3% of its business. 10% of its business is dependent on the UK. Brexit really is not that big of an issue, and any increased costs will be offset by sterling.”
The fund manager insists he is not trying to downplay the economic risk, and indeed the risk to UK industry caused by Brexit. But he states the impact to listed companies will be marginal.
“19% of the UK market is oil and mining, 7% is pharmaceuticals, 10% is consumer goods,” he explained. “The UK stock market has very little to do with the domestic economy or trading across borders.”
And for those businesses who are directly impacted, Gergel says there are work-arounds. He cites another example of a biscuit manufacturing firm who supply Marks & Spencer (MKS). In order not to be hit by export duties, M&S is moving its production from Holland to the UK.
The Real Risk of Brexit
That is not to say Brexit poses no risk at all to UK equities, and their shareholders. Gergel outlines what he calls a “secondary risk”; that Brexit causes an economic shock, and the subsequent dip in consumer confidence has a knock-on effect to markets. If consumers scared by the spectre of recession stop spending money, retail stocks, listed pubs and restaurant groups, travel companies and even supermarkets could be adversely affected.
There is also the small, but significant, political risk; if Brexit is poorly handled by the current Government, it increases the risk of a change in ruling party and Prime Minister to Labour.
“A Labour Party government, whatever your political views, would make the stock market nervous,” said Gergel. “Particular sectors such as utilities would feel the brunt of their policies.”
Confusion Across the Channel
Gergel speculates that part of the reason Brexit is proving difficult to negotiate is because our European counterparts do not understand why the UK voted to leave the European Union.
“They do not understand why we voted – it doesn’t make sense from an economic sense as far as they are concerned,” he said. “They see the EU as a promoter of peace and security. During the unification of East and West Germany Europe took an economic hit in order to pursue an ideal, and they will be willing to do that again. Appealing to the other members on an economic argument won’t work.”
