Since it would take two years to negotiate an exit the uncertainty is widely expected to impact on GDP growth and could impact consumer spending, which would be unhelpful for all in the retail sector, though is unlikely to last long term, said Investec. “Certainly we wouldn’t expect a sharp impact on sector profitability as was seen in 2008 at the start of the global financial crisis,” said the firm in a sector research report.
“The status quo would definitely offer more medium term certainty, which should be a positive for the economy, sentiment and demand, both from a corporate and consumer perspective,” said the report.
In terms of profits, economic and currency moves would be key, in Investec’s view. The firm explained that companies with international earnings, high margins, flexible cost bases and a UK sourcing bias are probably best placed such as Kingfisher, Dixons, JD Sports, ASOS & boohoo. Those with UK earnings and substantial international sourcing are less well placed potentially,” the paper noted.
Investec views the top issues that could hit UK retailers as relating to five main areas: weaker economic backdrop and consumer demand, sterling weakness, less low skilled labour, change to trade terms between UK and EU and the basis on which investment decisions are made.
But none of these key issues are new to UK retailers and the obstacles are surmountable, said the firm. “We think retail would be relatively better positioned than many other sectors from a stock market perspective given the sector’s cash generation and the number of growth and self-help stories,” the firm said.
Potential change in trade terms following Brexit would have little impact as most retailers already source from non-EU countries (such as China) and already pay import duty on sourced product, said Investec. Worst case scenario – that the UK negotiates a “most favoured nation” status, would also have little impact as the simple average weighted non-agricultural import tariff the EU imposes for MFN status is 4.2%.
Similarly, as retailers base their investment decisions on “the legal system, stability, developed nature of market and local consumer tastes” rather than if the country is in the EU, a Brexit would have little impact on corporate investment decisions, according to Investec.
