What stocks would be hardest-hit by a no-deal Brexit?

We look at four sectors that could be hardest-hit in the event of a no-deal Brexit.

HSBC

Top no-deal Brexit stocks to watch

A no-deal Brexit would cause significant disruption for businesses and economies in the UK and the EU. The rules that govern the huge amount of trade done between them would change overnight, falling back on World Trade Organisation (WTO) rules.

That means businesses would wake up to a drastically different environment at the start of 2021, after the transition period that has kept trade flowing as normal comes to an end at 2300 GMT on December 31.

The FTSE 100 has already underperformed global markets this year because of Brexit and a no-deal would only compound that, while the pound is expected to plunge. You can read more about what a no-deal could mean for markets, including the FTSE 100 and the pound, here.

However, the impact of a no-deal will be complex and vary depending on what industry you’re talking about. For example, a company mining gold in Africa will be much less affected compared to the supermarket that imports fresh fruit and veg across the border every day.

It is important to note that the UK is set to lose more under a no-deal than the EU. It would impact just one market for the 27 EU countries, whereas the UK will see trade overhauled with its single biggest trading partner.  

UK stocks are therefore vulnerable. The hardest-hit will be those with exposure to the UK economy and the pound, as well as those industries that have highly integrated supply chains spread across the Channel.

Banks

The performance of banks is closely-tied to the economies they operate in. The UK economy has taken a battering because of the pandemic and a no-deal Brexit only threatens to exacerbate that, while a fall in the pound won’t help the banks either.

There are also concerns that the Bank of England could introduce negative interest rates next year in the hopes of reviving the economy. Interest rates are already at record lows, but negative rates would mean banks would have to effectively pay to deposit money with the central bank, hurting profits. It would encourage the banks to lend and consumers to borrow, but this would come at a time when unemployment is rising and the amount of bad credit on the bank’s balance sheets rises.

The banks have been given a clean-bill of health recently, with regulators stating the industry has big enough buffers to weather any economic fallout. However, while the banks might be prepared for whatever is around the corner, it does not mean their customers are.

The impact will be worse for some banks than other. Lloyds is seen as having the greatest exposure to a no-deal because it solely concentrates on the UK, whereas the performance of banks like HSBC and Standard Chartered are more tied to Asia.

Housebuilders

The housebuilding market is also closely-linked with the health of the UK economy and the sector has proven sensitive to the ups and downs of Brexit talks.

There are several implications for UK housebuilders under a no-deal. Firstly, a weaker pound will increase costs by reducing the industry’s buying power when purchasing materials overseas. Secondly, the end of free movement could cause a labour shortage considering the number of people that come to work in the UK construction industry from the EU.

Housebuilders will still boast strong fundamentals. House prices could experience short-term pressure under a no-deal but are expected to continue to grow over the coming years, and there is no risk of supply outstripping demand. However, demand could be hurt by a weaker economy and rising unemployment, and most of their customers will still have to rely on borrowing from the banks.

The stocks to watch include Berkeley Group, Barratt Developments, Persimmon, Taylor Wimpey, Redrow, Bellway and Countryside Properties.

Automotive sector

The automotive sector has often been at the forefront of the Brexit debate and used as a prime example of an industry that faces catastrophe in the event of a no-deal.

The UK is used by automotive manufacturers as a springboard to produce cars and sell them into the EU. In fact, 8 out of 10 cars produced in the UK are exported to the EU. Meanwhile, the UK is regarded as a sizeable market for cars made in the EU.

However, a 10% tariff would be introduced on new cars flowing over the Channel under a no-deal, making it far less economical for carmakers. Border checks also threaten the industry’s just-in-time supply chains. Honda recently had to stop production of the Civic in Swindon because the delivery of parts was delayed at the ports.

The Society of Motor Manufacturers and Traders (SMMT), the UK trade body, warned in November that the European automotive market had already taken a EUR100 billion hit from the pandemic this year and that a no-deal would ‘deliver another EUR110 billion blow to manufacturers on both sides of the Channel’.

The attractiveness of the UK as a place to manufacture cars to sell into the EU would be severely diminished under a no-deal, and the SMMT has said annual output would drop from over 1.3 million vehicles in 2019 to ‘consistently’ below 1 million per year – resulting in £55 billion worth of production losses for the UK alone over the next five years.

Most UK car producers are based overseas, with Ford, BMW, Nissan and Toyota all operating UK plants, whilst Mercedes, Volkswagen and others also sell significant quantities in the UK.

Supermarkets

Supermarkets have been cited as one of the few sectors to have benefited during the pandemic because they have been able to remain open throughout the lockdowns, swallowing up sales from the closed hospitality sector as well as non-food sales from retailers.

Tesco, Sainsbury’s and Morrisons have all seen revenue rise this year as a result, but it is not helping their bottom-lines as they have had to hire extra staff and install protective equipment. More importantly, the accelerated shift online hurts margins as supermarkets seem determined to offer customers the same prices as they do in-store despite significantly higher costs to factor-in the pickers and delivery drivers. The industry is already adapting but this is not cheap. A no-deal Brexit would only result in further drastic change for supermarkets.

The immediate problem will be ensuring the shelves remain stocked if border checks are introduced. This is especially true for perishable items like fruit and veg, with 62% of the UK’s fresh food coming from the EU, mostly Spain and the Netherlands. The UK government has already told supermarkets to stockpile non-perishable items in the event of a no-deal.

Over the longer-term, supermarkets would suffer from a weaker pound as their purchasing power will be reduced when importing goods from overseas. A weaker economy would exacerbate the battle on price as consumers tighten their purse-strings at a time when inflation is expected to rise.

Supermarkets would look to circumnavigate any problems a no-deal Brexit throws up, such as sourcing goods elsewhere or focusing on home-grown produce, but this will only add to rising costs as supermarkets shift online and ensure they are operating safely during the pandemic.

Tesco, as the largest supermarket, has scale to help cushion any rise in the cost of goods and has already vowed to price match the discount chains, putting it in good stead to retain customers. Morrisons has said it is in a ‘good position’ to weather any disruption from Brexit as two-thirds of its products are British and because it makes nearly half of its own food in UK-based plants.

How to trade a no-deal Brexit

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