Thank goodness for the English football team. Their World Cup heroics allowed Great Britain to think about something other than the growing shambles around Brexit, which started out as a nutty idea and has evolved into a political comedy.
Canadian investors should keep a close eye on the continuing spectacle, because it may generate some interesting buying opportunities over the next few months.
A bit of background: This week, British Prime Minister Theresa May unveiled the outline of a Brexit plan that looks suspiciously like BINO – Brexit in name only. Her proposal would align an independent Britain with many European Union regulations, leaving the country as essentially a non-voting appendage to the trading bloc – one that would follow its rules, but without any real say in determining them.
Of course, this loss of voice is pretty much the opposite of what many hard-line Brexiters had dreamed of achieving, and two British cabinet ministers promptly quit in a huff. U.S. President Donald Trump, in his usual subtle fashion, has rushed to weigh in on the matter, claiming the plan could scupper any chance of a trade deal between Britain and the United States.
Look for more fun ahead as Britain prepares to leave the European Union on March 29, 2019. One scenario would be a descent into chaos, which could happen if Ms. May puts a final deal on Brexit before the British Parliament and members reject it. “If the deal is voted down by Parliament we are in ‘anything can happen’ territory, and that anything includes leaving with no deal, no Brexit at all, a new prime minister or even a new government,” writes Simon Wren-Lewis, an emeritus professor of economics at the University of Oxford.
Any burst of additional uncertainty would likely be reflected in the price of British stocks, which already appear cheap on many metrics. Consider, for instance, the FTSE 100, the benchmark for the largest, blue-chip companies on the London Stock Exchange. It features a dividend yield of 4.1 per cent and a price-to-earnings ratio below 14. Compared with stocks in Canada or the United States, those are tempting valuations. In May, Morgan Stanley argued British stocks could rise 10 per cent over the coming year.
To be sure, there are reasons for the attractive dividend yields and modest valuations among the biggest British stocks. Many are aging behemoths – banks, oil producers and tobacco companies – with limited prospects for expansion. The good news, though, is that companies including HSBC Holdings PLC, Royal Dutch Shell PLC and British American Tobacco PLC are also huge multinationals with the capacity to weather storms.
A spell of Brexit chaos could make the British stock market’s already tempting value proposition quite compelling. Canadian investors can invest in the index through a couple of U.S.-listed exchange-traded funds – the iShares MSCI United Kingdom ETF (EWU) or the SPDR MSCI United Kingdom StratFacts ETF (QGBR).
Of course, there are other possibilities as well. Perhaps a soft Brexit deal, similar to the one Ms. May has outlined, will win approval from both the British Parliament and the EU. But even in that relative placid scenario, there are likely to be opportunities as companies shift headquarters to reflect the new reality.
Unilever PLC offers one glimpse of what could come. The giant maker of Dove soap, Ben and Jerry’s ice cream and Marmite sandwich spread has operated for decades under a dual headquarters arrangement in which management is split between Britain and the Netherlands. The arrangement involves two annual general meetings, two corporate boards and stock listings in both countries.
But Unilever announced earlier this year that it would consolidate its headquarters in the Netherlands. Its stated reason isn’t Brexit exactly, but the desire for a streamlined legal structure that would make mergers and acquisitions easier. However, it seems likely that Brexit is playing at least a supporting role in the decision.
Here’s where things get interesting: The company wants to maintain a British stock listing, but is likely to fail the requirements for continued inclusion in the FTSE 100 once it shifts its head office. If so, its departure may entail mass selling of its shares by passively managed index funds that use the FTSE 100 as a benchmark. That could result in a fall in its share price, for reasons that have nothing to do with its performance or its value. At that point, the stock – which is already rated a “buy” by the majority of analysts covering it – would make for a very tempting purchase.
Could other companies face similar dilemmas post-Brexit? It’s entirely possible and offers an excellent reason to stay tuned to the Brexit soap opera.