With Brexit likely to dominate news headlines over the coming months, internationally-focused shares could become increasingly appealing to investors. After all, the UK faces a period of significant change from both an economic and political perspective. Investors may therefore seek to reallocate their capital towards stocks which may be less affected by the continued uncertainty caused by Brexit.
Two shares which could offer growth potential in spite of Brexit-related risks are Diageo (LON:DGE)and Reckitt Benckiser (LON:RB). They operate globally and have strong growth potential across a variety of emerging and developed markets. Since they report in sterling, they may also gain from a weaker pound.
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With a vote on Theresa May’s Brexit deal less than two weeks away, political risk is clearly at a heightened level. The chances of the deal being passed by Parliament seem to be slim, with a significant number of Conservative MPs as well as other political parties set to vote against it. Should it fail to gain a majority among MPs, the near-term future for the UK economy could become more uncertain as a no-deal Brexit becomes increasingly likely. Although such a deal could end up being positive for the UK economy in the long run, investors may factor in a period of disruption in the short run.
Even if Theresa May’s Brexit deal makes it through Parliament, there are significant concerns among investors as to how it could impact the UK economy both in a transitional period, and in future years. This could lead to investors seeking larger margins of safety for UK-focused shares, while the performance of the UK economy may suffer from lower levels of confidence.
Given the risks facing the UK economy, having at least some exposure to global stocks could be a sound move for investors. Although the world economy faces the prospect of higher US interest rates and the potential for further tariffs, increasing a portfolio’s geographic diversity during the Brexit process could improve its risk/reward ratio.
Diageo and Reckitt Benckiser have exposure to a variety of developed and developing economies across the world. Both companies have a range of popular brands which provide them with significant pricing power as a result of customer loyalty. Diageo is refocusing on its core brands, with a number of non-core beverages sold recently as part of its plan to become increasingly efficient. Reckitt Benckiser recently effected a restructure following its acquisition of Mead Johnson, with the infant formula specialist providing it with a potential growth catalyst in China.
If Brexit concerns increase, the two companies could benefit from a weaker pound. Since the EU referendum, sterling has depreciated by around 12% versus the dollar. Further weakness would be unsurprising given the apparent unpopularity of Theresa May’s Brexit deal and the fear among some investors regarding a no-deal scenario. With Diageo and Reckitt Benckiser being internationally-focused businesses which report in sterling, they could benefit from a positive currency translation boost in their financial figures. This could help to drive their bottom lines even higher over the medium term.