In the weeks following the shock Brexit vote two FTSE 100 companies announced their intentions for the future – a future in which the UK was not a part of the European Union. These two companies; large and established enough to be considered a bellwether for their respective sectors and indeed UK plc, took rather different tacks.
Lloyds (LLOY) announced 3,000 job cuts, closing 200 branches and warned that Brexit would hamper its ability to generate capital in the future.
Chief executive Antonio Horta-Osorio explained: “Following the EU referendum the outlook for the UK economy is uncertain and, while the precise impact is dependent upon a number of factors including EU negotiations and political and economic events, a deceleration of growth seems likely.”
Lloyds share price is down to 53p today from 73p the day before the vote. Morningstar equity analyst Stephen Ellis said that Lloyds was better positioned than most peers to handle Brexit given its simple, lower risk business model focused on retail and commercial lending, but added: “We do expect Lloyds to see higher loan losses, as the U.K. property market has been negatively affected already with demand falling, and slower growth. We believe the U.K. is likely to enter a recession, or at the very lease see sharply lower economic growth.”
Looking for Post-Brexit Investment Opportunities
GlaxoSmithKline (GSK) reacted rather differently to the vote, announcing a joint venture earlier this month called Galvani Bioelectronics, with a unit of Google-owner Alphabet (GOOG). The FTSE 100 pharmaceutical stocks said Galvani, which will be 55%-owned by Glaxo and 45%-owned by Alphabet's Verily Life Sciences LLC unit, will be based in the UK and will focus on the research, development and commercialisation of bioelectronic medicines.
Richard Jeffrey, chief investment officer of Cazenove Capital Management said that he expected the spirit of capitalism to positively surprise in the aftermath of Brexit – and hailed Glaxo as an example of this.
“There is a mood amongst some people that we have done a terrible thing as a nation voting to leave the European Union,” he said. “But there is a way forward. This could be a very exciting opportunity, the UK has not been towed thousands of miles out into the Atlantic – we are still in a favourable geographical position and the EU has a £68 billion trade surplus with the UK. If the chancellors of Europe penalised the UK, the German auto-manufacturers and the French wine industry would soon bang on their doors in outrage.”
Jeffrey said there was an entrepreneurial mood in Britain – especially amongst the younger generations – which would drag the post-Brexit negativity into growth.
“Brexit will have some negative impact, there will be a spending hiatus, but then I expect us to benefit from a weak pound – exports will be cheaper for buyers, there will be increased competition,” he said.
Jeffrey also cited the recent takeover bid for ARM Holdings (ARM) by SoftBank, which has pledged to keep the chip-maker in Britain, saying that Britain had a "wealth of intellectual capital".
Europe May Face Future Difficulties
The European Union is not the powerhouse it once was. In 1980, the collective nations accounted for 30% of the world economy, now they represent 16%. Similarly, in 1995 the EU nations were responsible for 26% of world trade, now that figure is 18%.
“I am not optimistic for the economic outlook for Europe,” said Jeffrey. “I expect GDP growth in the UK to be around 1% next year, but for the EU there are deflationary pressures. Italy, Portugal and Greece are in trouble. The concept of the Euro works well when all the member states are growing at the same pace – but when some struggle the single currency works against them as they are unable to grow their economies by devaluing their currency.”
