Now is a crucial moment. A Brexit deal is at hand—or at least it was until Parliament postponed a vote on Saturday. If it eventually passes, and is put into force before the deadline of Halloween in America, there is a chance that by Thanksgiving, conversations on the matter will have petered out to a few hopeful comments about what it means for gross domestic product. If so, those of us who haven’t taken the six-month sabbatical from work and family that seems needed to figure out what the heck is going on over there could yet pass unnoticed.
Danger lurks, however. These next few days will bring more Brexit talk than usual: clients, Facebook friends, Gary from sales, who can’t believe you haven’t seen Life of Brian. Here’s a last-minute guide for American investors pretending to understand Brexit.
Brexit is a portmanteau, or mushing together of words, like bromance, turducken, and Chunnel. It means British exit, in this case from the European Union, a trade bloc whose members are united in everything except language, culture, politics, wealth, fiscal viability, historic harmony, contiguous geography, and in some cases, currency.
Even under a middle-ground outcome, Brexit could cost the British economy 6.5% of GDP, UBS reckons. But that’s cumulatively over seven years, taken as a percentage of one year’s GDP. And more than half of it has already been endured, starting in 2016, when Brexit was born as a you-wouldn’t-dare referendum, and voters dared.
Much of the discussion has seemed like an egg-centered debate: soft or hard, but it won’t be over easy. A soft Brexit means staying closely aligned with the EU on trade, and is favored by Britons who oppose leaving. Hard means a clean break, and that could cost an estimated 9% of GDP cumulatively, along with 450,000 jobs.
Pro tip: If a Brexit discussion gets too detailed, scare the other party off by insisting that a hard exit would “force the BOE back to the ZLB with more QE.” Just in case your bluff is called, that’s Bank of England, zero lower bound, and quantitative easing, and it means if you Brexit-’til-you-wrexit, spenders will need to be stimulated, and savers, scolded.
Don’t get bogged down with the players. They turn over too quickly to learn their names. There’s a guy named Boris Johnson, who people compare to Donald Trump, because he’s brash and has a mop of blond hair. “We’ve got a great new deal,” he tweeted this past week, which is classic Trump, but then, sometimes he jogs in shorts, which is not.
Anyhow, the new deal tries to solve the issue of the “Irish backstop,” which has nothing to do with offshore tax loopholes, or leaving parties without saying goodbye, and everything to do with avoiding new checks or infrastructure between Ireland, which is in the EU, and Northern Ireland, which is part of the U.K. This part of Brexit is the most sensitive, and acceptance of the new deal is not assured.
Stocks tend to price in worst-case scenarios, and anything other than a hard Brexit could lead to upside for attractively priced U.K. names. UBS highlights home builders Berkeley Group Holdings (ticker: BKG.UK) and Taylor Wimpey (TW.UK), retailer Tesco (TSCO.UK), and Lloyds Banking Group (LYG).
If you end up trapped in a Brexit conversation and can’t remember those companies, British names are easy to invent by combining syllables that sound vaguely profane, but aren’t. Just tell people you bought some Bottomsworth & Wiggles, and are thinking about writing the puts on A.J. Fufferton. Both look oversold.
A portfolio manager popped by this past week and talked about three stocks he likes on three continents. Damon Ficklin comes from Polen Capital in Boca Raton, Fla., which oversees $30 billion across separate accounts and mutual funds. He used to work on Polen Growth fund (POLRX) and has moved to Polen Global Growth (PGIRX), which is tiny, but has returned 18% a year over three years, ranking among the top 2% of peers, according to Morningstar.
Ficklin is bullish on CSL (CSL.Australia), based in Australia; EssilorLuxottica (EL.France) in France; and Zoetis (ZTS), in New Jersey. If there is a theme here, it’s prosperous, pricey, and peppy. All three go for over 30 times this year’s estimated earnings, and have a good shot at growing earnings at a double-digit pace for years to come.
CSL specializes in IVIG or intravenous immunoglobulin treatments. Those involve obtaining antibodies from the blood of healthy people and delivering them to people whose antibodies are compromised by disease, or by chemotherapy. The company also has a hand in flu vaccines. Revenues have grown at a compounded 9% a year over the past decade.
Luxottica of Italy was once the subject of a 60 Minutes piece on whether it controls too much of the market for eyeglass frames. That was before last year’s merger with French lens giant Essilor, to form EssilorLuxottica. Europe, it seems, has figured out a new way to tax Facebook and Google—by charging more for our ability to see our screens. Ficklin says once these companies integrate their supply chains, earnings growth could find a higher gear. I bet.
Zoetis makes medicine for companion animals and livestock, and has exposure to rising wealth in two ways: more spending on pets and increased consumption of protein. Animal drugs tend not to face as much generic competition as human ones, even after patents expire. Zoetis is branching out into treatments for new ailments, like animal psoriasis. If they are going to start treating human stuff in pets, the possibilities seem endless. There is anxiety, attention deficit, and the one in the commercials where the guy holds up crooked vegetables, but he isn’t talking about cooking.