By Carla Mozee, MarketWatch
Carl Court/Getty Images
The spotlight will shine on U.K.’s large-cap stocks in the aftermath of the historic Brexit vote, but keep tabs on midcaps too, as many of those companies have more exposure to the British economy than their blue-chip counterparts.
The outcome of the highly anticipated U.K. vote to decide if Britons favor exiting the European Union, dubbed Brexit, will be determined early Friday morning London time. Many market participants fear that a vote in favor of leaving Europe’s trade bloc has the potential to destabilize the EU and unsettle British and European markets.
“There would, without question, be something of a rout,” in the blue-chip FTSE 100 index /zigman2/quotes/210598409/delayed UK:UKX -1.73% , said Richard Hunter, head of research at Wilson King Investment management. That’s if most voters back ditching the EU, as that runs against what’s viewed as the most likely outcome.
“If we were to say that the FTSE 100 would drop 5% on the news,” in the event the referendum shows support for seceding from the EU, “you would probably be looking at something near double that [decline],” on the midcap FTSE 250 index, Hunter estimated.
More than half, about 53%, of revenue from companies comprising the midcap gauge /zigman2/quotes/210598417/delayed UK:MCX -1.16% are linked to the U.K. economy, according to FactSet data. That compares with the roughly 28% exposure for its larger-cap FTSE 100 counterparts.
The FTSE 250 “tends to be more representative of UK PLC,” and that is “where we’d feel much more pain,” he said.
Meanwhile, FTSE 100 companies tend to boast “strong overseas earnings, which would mitigate some of the uncertainty given the fact that we would have a weaker pound,” Hunter said.
A weaker pound /zigman2/quotes/210561263/realtime/sampled GBPUSD -0.1666% /zigman2/quotes/210561182/realtime/sampled EURGBP +0.0223% would make U.K. exports less expensive to buy for holders of currencies.
“[W]e stay with our preference for U.K. exporters versus domestic, via overweight FTSE 100 versus FTSE 250,” ahead of the referendum, J.P. Morgan told clients in Monday note.
“In the event of a Brexit, I don’t think the risks are fully priced in, not even half priced in,” said Fawad Fawad Razaqzada, technical analyst at Forex.com.
If the vote swings for the remain camp, the FTSE 100 “may go up to 6,500 but I can’t see it going significantly beyond that level,” he said, as blue-chip investors have other considerations aside from Brexit, such as oil prices and growth in the key Chinese and U.S. economies.
Stocks and sectors
Credit Suisse on Wednesday said it would cut its FTSE 100 year-end target to 6,200 from 6,600 if a Brexit happens. Financials, real estate and transportation would be the worst performing sectors, based on correlations with yields on U.K. government bonds, or gilts, the pound and purchasing manufacturing indexes.
The best performing sectors would likely be pharmaceuticals, consumer-staples and energy, said Credit Suisse.
Construction company and FTSE 250 constituent Balfour Beatty PLC /zigman2/quotes/202863772/delayed UK:BBY -1.74% should outperform relative to its sector in either referendum outcome, said Liberum, which closely tracks small and midcap U.K. equities.
Also in that scenario, broadcaster ITV PLC /zigman2/quotes/205378065/delayed UK:ITV -3.07% and plumbing-products company Wolseley PLC , which are part of the FTSE 100, should be outperformers.
“On valuation we see construction, housebuilding, leisure and staffing as potential benefactors of the ‘Remain’ vote while real estate and retail may be vulnerable to ‘Leave’,” wrote Liberum strategist Sebastian Jory, in a June 20 research note.
“We are happy to own pharma, tech and chemicals in the case of Brexit,” he said.
The FTSE 250 has a market value of roughly £340.81 billion ($500.6 billion) and represents about 17% of market capitalization in the U.K., according to FactSet data.