The prospects for the UK economy are highly dependent upon how Brexit progresses. While it is impossible to say exactly what deal (if any) will be signed between the UK and the EU, the government seems to have leant towards a ‘harder’ Brexit thus far. There have been compromises on both sides, but ultimately the Conservatives seem intent on adopting a tough stance towards the EU.
In the long run, this may prove to be a good or bad thing. It is a known unknown. However, in the medium term it has the potential to create volatility and challenges for UK-focused companies. As a result, buying shares with international growth potential could be a worthwhile pursuit.
Uncertain outlook
With Brexit now just over a year away, it is likely that investors will continue to focus on the prospects for the UK economy post-March 2019. Over the course of the next year, it would be unsurprising for there to be significant uncertainty for the macroeconomic outlook, since both sides look set to stand firm with regards to their ‘red lines’. One notable example is the Irish border question, which remains a roadblock. Such challenges could mean that there are times when a deal seems highly unlikely, and pressure on the valuations of companies focused on the UK could ramp-up to some degree.
Clearly, there is the potential for a positive deal for the UK, as well as a transitionary period to smooth out the change. In such a scenario, stocks operating in the UK may gain a boost over the coming months. However, in spite of an EU summit being set to take place shortly, the prospects for a favourable deal being signed in good time seem slim. Therefore, just as businesses are planning for potential difficulties, investors may wish to do likewise.
Global opportunities
Although the idea of investing in international stocks may seem relatively obvious, there could still be growth opportunities for many of them. Not only could they benefit from what remains a resilient global economy, they could also see their earnings gain a boost from the prospect of a weaker pound. This could take place if uncertainty builds over the next year due to the lack of a deal between the UK and the EU, with sterling having the potential to come under renewed pressure.
Not only could they benefit from what remains a resilient global economy, they could also see their earnings gain a boost from the prospect of a weaker pound.
Therefore, investing in stocks such as Just Eat (LON:JE) and Reckitt Benckiser (LON:RB) could be worthwhile. Neither is cheap at the moment, with their PEs being 45 and 17 respectively, but both stocks seem to offer high growth potential.
Bright futures
For instance, Just Eat is forecast to post a rise in EPS of over 30% in each of the next two years. With 44% of its sales being generated outside of the UK and the company focused on further acquisition prospects, it could perform well in future. In addition, takeaways may be a surprisingly defensive area, with consumers potentially trading down from dining out should economic conditions deteriorate.
Similarly, Reckitt Benckiser has strong growth potential. A restructuring earlier this year could lead to a more efficient business model. Meanwhile, the acquisition of Mead Johnson may set the company up for strong growth due to its exposure to the lucrative Chinese infant formula market.
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Therefore, while Brexit may not be as hard as some investors anticipate and could prove to be a good or bad move for the UK, in the meantime buying global companies could provide a solid risk/reward opportunity.
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