The heightened risk of Great Britain leaving the European Union has hammered global equities and crunched Australian stocks with significant United Kingdom exposure. The possibility of a Brexit has also create a buying opportunity for those who can see through the panic.
As expected, the push for Britain to leave the EU is gaining momentum. Credible surveys suggest the Leave campaign has overtaken the Remain campaign, but whether that sentiment translates into the June 23 referendum is yet to be known. The International Monetary Fund has warned of severe damage to the global economy if Brexit occurs. Some economists believe Brexit would slash the UK’s economic growth, drive the pound sterling sharply lower, and disrupt one the world’s key economies.
I’m betting on the Remain campaign to win the vote – just. I’m unconvinced that Britain’s exit from the EU, should it occur, would do as much long-term damage to its economy as the pessimists suggest.
Also, a Brexit cannot happen overnight. It would take years of negotiations and more again to implement the plan, giving companies time to respond to any eventual exit of Great Britain from the EU. Optimists say a sharply lower pound would boost British export competitiveness.
That is not to downplay this event’s potential to shock and damage financial markets in the short term – it’s the last thing markets need right now. Rather, it’s to highlight that markets may have over-reacted lately, at least in their assessment of ASX-listed companies with significant UK earnings.
A tumbling British stock market and pound could present a long-term buying opportunity, as could a handful ASX-listed companies with decent UK exposure.
CYBG Plc, a favourite of this column in 2016, dropped from $5.59 this week to as low as $5.21 as Brexit fears gripped global markets. The National Australia Bank spin-off owns the Yorkshire and Clydesdale banks in Northern England and makes a 100 per cent of revenue in Britain.
BT Investment Management fell from about $9.60 at the start of this week’s trade to $9.02. The fund manager earnings more than 60 per cent of its revenue in the United Kingdom through its strongly performing subsidiary, J O Hambro Capital Management. BT said at its 2016 half-year results that it was well placed to manage any outcomes from a Brexit.
Henderson Group Plc, another fund manager with European exposure (61 per cent of revenue), fell from $5 to as low as $4.48 this week before a small price recovery. The UK-based investor, dual listed on ASX and the London Stock Exchange, has delivered excellent returns over three and five years.
QBE Insurance, Westfield Corporation, IRESS Market Technologies and Macquarie Group also have significant UK operations, but not to the same extent (as a proportion of their overall revenue) as CYBG, BT and Henderson.
A Brexit is bad news for Australian companies that would suffer from a sharp slowdown in the UK economy and would be affected by a falling British pound as profits are translated into Australian dollars. But referendums are notoriously hard to achieve, although this one will clearly do down to the wire.
I have identified CYBG for The Bull several times this year and have written favourably on BT Investment and Henderson Group as part of a broader interest in listed wealth managers.
To recap, CBYG has excellent long-term prospects as a standalone company. Like all good de-mergers, it is rapidly finding cost savings and other efficiency gains, and appears to have a new lease of life now that is no longer a problem child within NAB.
I still believe the UK banking sector has better prospects that its Australian peer and that UK banks are more attractively valued than our big-four banks.
CYBG was due for a price pullback given such strong share-price gains after its demerger and dual listing on ASX in February. The recent sell-off provides a buying opportunity, but value investors might stand aside as negative Brexit sentiment weighs on CYBG.
Chart 1: CYBG#FOTO:306865655:600#Source: The Bull
BT Investment Management has also starred, delivering an annualised total return (including dividends) of almost 50 per cent over three years. I last covered BT for The bull in July 2015. BT’s wholly owned J O Hambro is going gangbusters and has potential to manage a much larger asset base in the UK, given its strong investment performance and fund inflows.
Chart 2: BT Investment Management#FOTO:306865656:600#Source: The Bull
Four broking firms that cover BT have a buy recommendation, six have a hold and one a sell, according to consensus broker forecasts. A median share-price target of $10 from brokers suggests BT is a touch undervalued after falls this week. That looks about right.
Henderson Group’s investment funds continue to outperform their benchmark indices – a precursor to attracting more money and boosting fee revenue in the medium term.
Henderson has noted that US institutions are cautious about allocating money to UK equities given Brexit risks. It expects at least two years of negotiations should Brexit occur and 5-10 years before full implementation.
Five of nine broking firms have a buy and Henderson’s median-share price target is A$5.50 according to consensus broking forecasts. Macquarie Equities value Henderson at $5.76 and has an outperform recommendation. At the current $4.64, Henderson looks the most undervalued of stocks considered in this column.
Chart 3: Henderson Group#FOTO:306865657:600#Source: The Bull
Tony Featherstone is a former managing editor of BRW and Shares magazines. The column does not offer stock recommendations or financial advice. It provides general commentary only. Readers should do further research of their own or talk to their financial adviser before acting on themes in this article. All prices and analysis at June 15, 2016.