Brexit negotiations began yesterday and where they will lead is hard to know. Regarding UK stocks, it is best to position yourself for a worst case scenario, which would be a hard Brexit and fragmentation of the UK and European markets. In such a case, the UK companies that would be hurt most are the ones most reliant on European revenues. These companies are also the ones that would rise the most on any news of a post Brexit trade deal. In other words, UK stocks with the most European revenues are the highest leveraged to the ultimate Brexit outcome. The ones with mostly UK-based and other revenue are the least dependent on the outcome and will tend to give you a calmer ride through the process.
Before we get into individual stocks, a quick update on the Brexit process. First of all, it must be said that no trade deal is necessary. No trade deals are ever necessary. All trade deals are ultimately crony deals that hurt companies without special privileges in favor of companies with a lot of lobbyists. All that really needs to be said is “The UK hereby agrees to free trade with no tariffs against anybody, regardless of any tariffs placed on us. Period.” That should really be the entire negotiation posture. There is no reason for any other negotiation, and let whatever is left of the EU institute whatever tariff to their own detriment, if they dare.
The belief that tariffs can only be taken down on a mutual basis is a myth based on a false theory of protectionism and tit-for-tat emotions that are not productive. If a tariff is levied against country A by country B, consumers in country A are hurt, and producers in country B are hurt. Country A adding a retaliatory tariff against country B will only further hurt consumers in country A and producers in country B. Retaliation makes no economic sense. It can only hurt you further in a trade war, and if you’re a government, reduce your tax base overall.
Obviously, free trade is not going to happen. It never does. Both sides will be eying some kind of crony deal, and if compromise isn’t found, a hard Brexit may result and fracture markets. There are some good signs though that at least the UK side is staffed with good people on the free trade side. For one, there is Steve Baker and David Davis, who both lean libertarian. Davis is the head Brexit minister and Steve Baker a junior Brexit minister. Baker has in the past called crony trade deals with the EU an exercise in “polishing poo”. He has also channeled free market Austrian economists Ludwig von Mises and F.A. Hayek in his speeches, something extremely rare. His being part of the UK’s Brexit staff is both good for principled reasons, but also increases the likelihood of a hard Brexit.
It’s impossible to know exactly what that chances of a hard Brexit without a crony deal are, but if it happens, these are the stocks that will probably get hit hardest. First is 888, which has a nearly even split between UK and rest of Europe revenues. Trade barriers between the two markets could force 888 to restructure its business somehow. The flipside of the coin is that if a deal is worked out, 888 will jump higher. A hard Brexit will not be fatal to 888, but it could slow business down and temporarily hurt shares.
William Hill has about 18% of its annual revenues coming from EU countries excluding the UK. That isn’t too much, but it is enough to affect the stock noticeably if Brexit talks go south. GVC-bwin.party could fare even worse in a hard Brexit. With much of its revenue coming from Germany, who will be in charge of the EU side of the Brexit talks, GVC is right in the middle of the negotiations. Much of Bwin.party’s revenues come from Germany, Italy, France, Spain and Belgium, so the combination of the two companies’ geographic strengths only compoundd the problem.
Companies with less to worry about are Ladbrokes, Rank Group, Paddy Power Betfair, and Playtech. Ladbrokes has 13% of its revenue from European retail excluding the UK, so it may get bumped a bit but not too badly. Rank has less than 6% of revenues coming from EU markets. Paddy Power Betfair is mostly UK and Australia, with 8.4% coming from other markets, and not all of that other is from Europe. Playtech only has €57M out of a total €643 in annual revenues coming from the EU, with the bulk coming from the Philippines and the UK.
In the end, the stronger companies will recover from any post hard Brexit fall. The weaker ones will have a tougher time. Those looking to add to positions in strong UK bookies may want to consider waiting until Brexit talks are concluded, and for now focus on stocks with less dependence on the outcome of talks. In the longer term though, Brexit, even a hard Brexit, will benefit all UK companies because the EU is a sinking ship. When it eventually disintegrates, probably along with the Eurozone, UK companies will be spared much of the trouble since they will already be out of this mess.
