20160606-高盛-Strategy_Matters_Five_questions_on_Brexit_and_equities_14页_468kb

Summary of "Five Questions on Brexit and Equities"

Core Content

This document analyzes the impact of Brexit on UK equities and European markets, focusing on how investors have priced in Brexit risk, the value of UK domestic stocks, the effect on US flows into European equities, the resilience of big caps, and the broader exposure of European markets to Brexit-related uncertainty.

Main Points

1. How has Brexit risk been priced?

• UK domestic stocks initially declined in early 2016 due to Brexit uncertainty, but rebounded in late April/May.
• The performance of UK-exposed companies has been highly sensitive to opinion polls and news flow.
• The discount for UK domestic stocks has narrowed from 20% to 12% in recent weeks, but is still significant.
• The market seems to price Brexit risk as a hit to domestic growth rather than a direct impact on international operations.

2. Is there value in UK domestic stocks and mid-caps?

• Yes, but the value gap is unlikely to close materially before the referendum.
• The 12% discount on a 12-month forward P/E basis is considered attractive.
• The underperformance of UK domestic stocks is linked to the slowdown in domestic economic activity.
• The potential for a 'remain' vote could lead to a recovery in these stocks.

3. Is the recent weakness in US flows into European equities a function of Brexit risks?

• Yes, US flows into European equities are highly sensitive to policy uncertainty.
• The correlation between US flows and the UK Policy Uncertainty index is strong.
• While the European Economic Policy Uncertainty index is a broader indicator, the UK-specific index has shown a stronger link with outflows.
• If the referendum result is 'remain', we expect a modest recovery in flows into Europe.

4. If the vote is to exit, would sterling cushion big caps?

• The FTSE 100 companies have significant exposure to international markets, with 80% of sales outside the UK.
• A 15%–20% depreciation of sterling could provide a cushion for these stocks.
• The FTSE 100 has outperformed European markets this year, partly due to the fall in sterling and rise in oil prices.
• However, the impact of Brexit on UK growth could lead to a discount for UK equities if the risks materialize.

5. What is the exposure of the rest of Europe?

• European indices are highly negatively correlated with UK policy uncertainty.
• The DAX and CAC 40 are also significantly impacted, with the DAX having 9% of sales exposure to the UK and the CAC 40 having 4%.
• The UK's exposure to the rest of Europe is not insignificant, but the broader political and economic uncertainty in Europe may have a larger impact than direct trade effects.

Key Information

• Market Performance: UK domestic stocks have experienced significant volatility, with a 14% underperformance at its worst.
• Valuation Discount: UK domestic stocks are currently discounted by around 12% relative to the FTSE All-Share.
• Policy Uncertainty: UK Policy Uncertainty index is a key driver of US flows into European equities.
• Sterling Impact: A depreciation of 15%–20% in sterling could benefit UK-listed global companies.
• Economic Impact: The potential for a slowdown in UK growth due to Brexit is a major concern, with economists estimating a hit to industrial production of 0.5–2.5 percentage points.
• Investor Behavior: UK domestic stocks are heavily owned by non-UK investors, with around 50% of ownership outside the UK.

Exhibits Overview

• Exhibit 1: UK mid-caps and domestic stocks underperformed the UK market.
• Exhibit 2: UK domestic stocks are at a discount to the broader UK market.
• Exhibit 3: FTSE 100 outperformed European markets, partly due to sterling depreciation and oil prices.
• Exhibit 4: US flows into European equities are correlated with policy uncertainty.
• Exhibit 5: UK Policy Uncertainty has a strong link with US outflows.
• Exhibit 6: GBP performance is closely tied to UK equities versus Europe.
• Exhibit 7: Non-UK investors own half of the UK market.
• Exhibit 8: The UK's exit from the ERM in 1992 was a good entry point for UK equities.
• Exhibit 9: UK small and mid-caps are most negatively correlated with UK uncertainty.
• Exhibit 10: DAX and CAC 40 have similar exposure to the UK and China.

Analysts and Contact Information

• Sharon Bell, CFA: +44(20)7552-1341, sharon.bell@gs.com
• Peter Oppenheimer: +44(20)7552-5782, peter.oppenheimer@gs.com
• Christian Mueller-Glissmann, CFA: +44(20)7774-1714, christian.mueller.glissmann@gs.com
• Ian Wright: +44(20)7774-2600, ian.wright@gs.com
• Lilia lehlé Peytavin: +44(20)7774-8340, lilia.peytavin@gs.com
• Jim McGovern: (801) 741-5572, james.mcgovern@gs.com

Disclosure

• The document includes a Reg AC certification, stating that the views expressed reflect the personal views of the analysts and are not influenced by compensation.
• Investment Banking Relationships: The document outlines the percentage of companies in each rating category that Goldman Sachs has provided investment banking services to.
• Legal Disclosures: The document includes disclosures required by US and other jurisdictions, such as Australia, Brazil, Canada, India, Japan, and New Zealand.