Ten U.S. stocks have a lot riding on the U.K. leaving the EU after a deal is reached, according to Goldman Sachs. In a research note, analysts at the investment bank said those 10 companies have the biggest revenue exposure to the U.K, generating upwards of 15% of their sales from there.
The stocks are: Newmont Mining Corp. (NEM), Pembina Pipeline Corp. (PPL), Affiliated Managers Group Inc. (AMG), Willis Towers Watson PLC (WLTW), Invesco Ltd. (IVZ), News Corp. (NWSA), LKQ Corp. (LKQ), Bank of New York Mellon Corp. (BK), MSCI Inc. (MSCI) and CBRE Group Inc. (CBRE)
Newmont Mining was identified as the company with most at stake, with three-quarters of its sales coming from the British Isles.
Outperformance for Some Shares
Last year, Goldman Sachs noted that U.S. stocks with the highest share of U.K. sales lagged domestic-facing stocks by more than 1,000 basis points (BPS) between January and mid-December. Analysts expect these same companies to continue to be affected by the current uncertainty surrounding Britain’s plan to leave the European Union (EU) after Prime Minister Theresa May’s Brexit deal was rejected by the British Parliament.
Since the delay of the Brexit vote on December 10, Goldman said U.K.-facing U.S. stocks have outperformed the rest of the S&P 500 index by 190 basis points. Analysts then went on to predict “potential for further upside if a clear path forward emerges.”
50-50 Chance of Delay
According to Goldman economists, there is now a 50% chance that Brexit will be delayed and eventually concluded with closer ties to the EU. Such a scenario, they pointed out, would benefit U.S. stocks that do business with their U.K. counterparts.
If a Brexit deal is reached, the investment bank also expects the British pound (GBP) to strengthen against the U.S. dollar (USD). Goldman predicted that successful negotiations, coupled with slowing U.S. growth and a dovish Fed policy, will lead sterling to rise by 9% against the U.S. currency over the next 12 months. Analysts, once again drawing upon examples from last year, pointed out that a strengthening British pound tends to result in U.K.-exposed stocks outperforming.
Not Without Risks
Despite taking a generally bullish stance on the outlook for Brexit, Goldman did warn that Britain’s deal to leave the EU remains “highly uncertain” and that any setbacks could have a negative impact on S&P 500 U.K.-exposed stocks.
For example, the bank’s economists said there is a 10% chance that the U.K. could leave the EU without a deal. Many believe exiting the EU without any trade agreements in place could throw the British economy into a recession and pose a serious risk to global growth.