The impact of Brexit on retail, travel and leisure stocks

Writer,

Archived article

Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

Jets on runway

Brexit threatens to hit UK consumer confidence which is negative for the retail sector. The fall in sterling will be costly for companies that import goods and services, though it should be a boom for exporters and UK assets may become more attractive to foreign buyers.

A decline in sterling could see sharp rises in fuel prices, diverting spending from other areas and possibly hastening the collapse of more high street retailers.

Companies that source goods from overseas and sell in sterling may see a squeeze on profit margins due to currency issues. Vulnerable stocks include Sports Direct International, Next and B&M European Value Retail.

Customer demand could be hit by the impact of imported inflation, as price rises may be tough for retailers to pass on in a deflationary environment.

Supermarket beneficiaries

Food stocks have tended to be positively correlated to inflation and the collapse of the pound brings forward the possibility of a return to positive food pricing, potentially helpful for Tesco and WM Morrison Supermarket.

Broker Shore Capital notes Aldi & Lidl import much more of their groceries than the UK supermarkets and face the conundrum of increasing prices or suffering lower margins.

RBC Capital Markets notes Brexit doesn’t really change anything for the consumer staples sector short-term, the UK being a relatively small market for companies which have little transactional currency exposure.

‘The one exception we would highlight is Diageo, which on a relative basis should be a beneficiary,’ writes analyst James Edwardes Jones. ‘That’s because 24% of its sales are of Scotch, with production and storage costs incurred in the UK – so these costs should come down. But only 6% of sales are in the UK. So Diageo, and to a lesser extent Pernod Ricard, should see a meaningful transactional benefit.’

Travel & Leisure companies

The economic uncertainty caused by Brexit combined with a possible increase in travel costs to Europe could benefit UK-based leisure firms while airlines and travel agents suffer.

Legoland and Alton Towers owner Merlin Entertainments looks like a clear winner in the event of a surge in ‘staycations’. It could also get a foreign exchange boost from the fall in sterling, which could in turn increase the number of tourists visiting Britain. The stock fell just 1.5% to 429p on 24 June, so while it isn’t one for investors wanting to grab a bargain its quality and relative resilience give it merit.

Pub group Enterprise Inns’ share price decline over the past week seems overdone. The company could profit from consumers choosing to stay in the UK rather than holiday abroad.

As a relatively low-cost going out option, it could get a lift if economic uncertainty causes consumers to turn their backs on expensive nights out and simply park themselves in the pub for a pie and a pint.

The same applies to pub group Marston’s, which slipped 9% to 140p on 24 June. A key challenge for pubs will be finding enough staff if Brexit results in reduced immigration.

Whitbread should be treated with caution because although its ‘value’ hotel chain Premier Inn is less correlated to the economy than higher-end chains, its revenues still track GDP, which is expected to fall after Brexit. According to Deutsche Bank, the market value of Whitbread’s properties in London could drop if there are substantial outflows in foreign capital, leading to a weaker balance sheet.

A poll by Comparethemarket.com found 10% of Brits are less likely to book a holiday following the ‘leave’ vote, which in the short-term would hurt airlines and travel agents like Thomas Cook and TUI.

British Airways owner International Consolidated Airlines has issued a profit warning after experiencing weak trading in the run-up to the referendum. There are also doubts over agreements for traffic rights to and from the UK.

EasyJet has also issued a profit warning blaming air traffic controller strikes, bad weather disruptions and a Brexit-related gloomier outlook.

Shares
This article is provided by Shares Magazine. Shares publishes information and ideas which are of interest to investors. It does not provide advice in relation to investments or any other financial matters and does not guarantee the accuracy or completeness of the information in this article.

Investors acting on the information in this article do so at their own risk and AJ Bell Media Limited and its staff do not accept liability for losses suffered by investors as a result of their investment decisions. Shares is published by AJ Bell Media Limited part of AJ Bell.