The United Kingdom is set to sever ties with the European Union (EU) after the British voted in favor of Brexit. The historic referendum on EU membership saw almost 52% of British voters in favor of leaving the European bloc and 48% against it.
Following the results, global stock markets sank on fears that the decision will hurt investments in one of the largest economies of the world. According to Reuters “the pound suffered its biggest one-day fall in history, falling more than 10% against the dollar to hit levels last seen in 1985, while the euro slumped more than 3%.”
Meanwhile, Britain's FTSE 100 stock index futures slumped 7%, while Germany's Dax futures fell about 9% in early trading. The Euro Stoxx 50 futures also sank more than 11%.
The Brexit tremors were also felt at the U.S. stock markets, with the futures at the S&P and Nasdaq plunging 5% early today. Futures on the VIX volatility index surged as much as 10.57% to 27.20, reflecting growing fear among the U.S. investors.
Brexit’s Effect on the US
The EU bloc exit will bar Britain from accessing the benefits of the free trading zone. Britain will now have to seek new trade agreements with countries around the world.
Generally these ratifications in international trade agreements take considerable amount of time. As previously warned by President Barack Obama, the Brexit will surely push U.K. to the “back of a queue’ for a trade agreement with the U.S.
We believe this is going to be a major drawback for U.S.-based companies doing business in the U.K.
Moreover, EU trade rules have allowed U.S. companies to freely operate within the bloc, provided they open a branch or subsidiary in any of the 28 member countries. Most of the companies picked London due to its close proximity to the rest of Europe and the availability of a large base of skilled workforce.
Per Deloitte, almost 40% of the European headquarters of the world's 250 top companies are in London. Post Brexit, these companies will have to establish new branches and subsidiaries to operate in the EU bloc, which will raise expenses and dent cash flows.
Meanwhile, one of the biggest U.S. banks, JPMorgan Chase JPM is planning to expand into the European continent at the expense of the U.K. through job cutting.
S&P 500 Stocks Likely to Bear the Brunt
According to data available from FactSet, the S&P 500 companies’ total revenue exposure to the U.K. is restricted to 2.9%. However, almost 30 S&P 500 companies earn over 10% of their revenues from the nation.
Here we narrow in on five S&P 500 stocks that are likely to suffer a fall following Britain’s departure:
One of the largest global brewers Molson Coors Brewing Company TAP has significant exposure to the U.K. with the country accounting for almost 34.3% of its revenues. Lately, the company has been witnessing negative estimate revisions. The Zacks Consensus Estimate for 2016 is currently pegged at $3.26, down 3 cents over the last 30 days.
PPL Corp PPL is a diversified utility holding company. Per FactSet data, almost 31.4% of the company’s revenues are generated in the U.K. Meanwhile, the Zacks Consensus Estimate remained stable at $2.34 over the last one month.
Willis Towers Watson PLC WLTW is a leading global advisory, broking and solutions company. It derives almost 27.3% of revenues from the nation. The Zacks Consensus Estimate for earnings remained steady at $7.86 over the last 30 days.
Invesco Ltd. IVZ offers a wide range of investment products and services. The company has a substantial presence in the U.K. with almost 22.5% of revenues flowing in from the region. The Zacks Consensus Estimate for 2016 earnings stands at $2.35, down by a couple of cents over the last 30 days.
One of the world's leading independent energy companies, Apache Corporation APA, has significant exposure to the U.K. with almost 20.1% of revenues coming in from the island nation. Notably, the Zacks Consensus Estimate is pegged at a loss of $1.45 per share, narrowing from a loss of $1.65 over the last 30 days.
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