Australian Investment Blog

Theresa May is preparing a very important speech for tonight which markets are hoping will deliver a long-awaited blueprint of how the UK "hopes" to leave Europe - we must remember this is a two way negotiation with the whole EU. The respected Sunday Times has reported that May is ready to withdraw from tariff-free trade with the region in return for the ability to curb immigration and strike commercial deals with other countries - this article led to the pound falling over 1% yesterday, trading around 20% below its level prior to the BREXIT vote.

With plenty of water to flow under the bridge the only certainty feels like volatility at present, today we are looking at 3 stocks we will consider buying if BREXIT fears lead to weakness and hence opportunity. Our view is the market has priced in a "hard BREXIT" and the downside to the pound is potentially limited under last year's 1.18 low, implying pound facing stocks can be bought if they spike down.Obviously with the political uncertainty these will be relatively high risk investments.

Over recent weeks we have kept a distance from Europe / BREXIT facing stocks in anticipation of the very volatility that is now unfolding but this can provide value. We have not surprisingly focused our attention on the Financial sector that we like over the next 6-months.

The British Pound versus the $US Daily Chart

1 Henderson Group $3.86

HGG is a stock we have been fairly active in over the years and a company we like, especially after their $6bn merger with US based Janus Group last year . Our view is the stock is in the too hard basket for many investors because prior to the merger it had over 60% earnings exposure to the UK, but it now has diversification with Janus and if the pound is close to a medium term low we are likely to get a an excellent entry level into the stock.

We are buyers of HGG ~$3.75 with stops under $3.50

Henderson Group (HGG) Chart

2 BT Investment (BTT) $10.58

BTT similarly to the old HGG has over 60% of its revenue generated in the UK. The stock has enjoyed a ~30% rally since Donald Trump's victory and to us only represents value into a correction.

We are buyers of BTT ~$10 with stops under $9.60.

BT Investment (BTT) Monthly Chart

3 Clydesdale Bank $4.68

As NAB's spin out of its UK assets CYB earns 100% of its revenue in the UK, clearly both high risk and return largely depending on the swings of the pound. This is a longer term story with a cost out program the main driver of earnings growth for the bank. Do note however, CYB does not pay a dividend now with expectations of an unfranked yield of 1.5% in FY17 going to 3.8% in FY18.

We are buyers of CYB around $4.20 but stops are under $3.50.

Clydesdale Bank (CYB) Daily Chart

Summary

• While we like all 3 discussed financials into weakness our favourite is HGG ~$3.75 with stops under $3.50.
• Our second choice would be CYB which we believe will be value around ~$4.20.

Overnight Market Matters Wrap

• The European markets were broadly lower overnight, while the US was closed commemoration of Martin Luther King Jr.
• Iron Ore continued the strength from Asia trade, rallying 3.86% higher to US$83.65/t. where the major miners, BHP and RIO rallied 1.58% and 2.06% higher in London trade.
• A quiet start is expected in the ASX 200 this morning, where the March SPI Futures is indicating a mildly soft open, testing the 5,740 level.

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All figures contained from sources believed to be accurate. Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy. Prices as at 17/01/2017. 9.00AM.
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