2017’s Early FTSE Favorites: Banks, Burberry, BAE and Builders


 Bloomberg

(Bloomberg) -- Much of U.K. Plc is looking forward to the new year -- 2018, that is.

For British business, the year that’s just begun will be dominated by Brexit. With Prime Minister Theresa May preparing to trigger talks on leaving the European Union by the end of March, companies are mired in uncertainty over the terms.

As executives worry about severing ties with the world’s largest trading bloc -- and all the currency fluctuations, regulatory risk and lost access to labor that could entail -- many will put investments on hold in 2017, hunkering down until a measure of clarity appears.

But that doesn’t mean this year will be a total write-off. Brisk growth in U.K. manufacturing, reported Tuesday, and the FTSE 100 index’s record high show some businesses are benefiting from the advent of Brexit. Events elsewhere, like the election of Donald Trump, may be a boon for others. Here are some U.K. businesses that could thrive in this brave new world, according to fund managers and analysts.

Military

BAE Systems Plc hit new highs within hours of Trump’s victory in November as investors priced in expectations that the company, which gets more of its revenue from the U.S. than any other country, will benefit from the president-elect’s military spending plans.

2017 may offer further opportunities for BAE, which makes fighter planes, tanks and ships, according to David Docherty, a fund manager at Schroders Plc. “The new government in Washington looks committed to increasing defense spending and wants its European NATO partners to follow suit,” he said.

Energy

Oil companies in the FTSE, like BP Plc and Royal Dutch Shell Plc, could benefit in the wake of an agreement by crude-producing nations to curb production, said Nathan Sweeney, a senior investment manager at Architas Multi-Manager Ltd. 

“Oil majors might benefit from a higher average oil price which could trend higher on OPEC production cuts,” Sweeney said in an e-mailed statement. The industry may also enjoy more sympathetic regulation after Trump’s Jan. 20 inauguration if his cabinet of climate-change skeptics adapts U.S. energy policy.

Construction

The U.K. government has pledged to build more homes, as well as a new runway at London Heathrow Airport, a nuclear plant and a cross-country high-speed railway.

“The construction sector should experience upgrades in earnings estimates and a valuation re-rating as governments increasingly look to infrastructure spending as a means of stimulating economic growth,” Schroders’ Docherty said.

The challenge for these companies may be the cost and availability of labor, as a substantial proportion of U.K. construction workers hail from the bloc Britain is trying to leave.

Financials

Rising interest-rate expectations are widely expected to offer a boost to one of the FTSE’s most heavily weighted sectors: banks. “With a much steeper yield curve, but short rates anchored at low levels, we now have a more positive outlook for interest income,” according to Rob James, an analyst at Old Mutual Global Investors.

Alex Wright, manager of the Fidelity Special Situations Fund, said he expects a revival of inflation to rescue bank stocks from the low valuations they’ve endured over the last few years, calling increased government spending and price increases “a theme with global relevance.”

Luxury

A Brexit boost to U.K. tourism saw British luxury brands like Burberry Group Plc and watchmaker Bremont benefiting from a discounted pound last year, as terror hurt visitor numbers across other parts of Europe.

“The weaker pound increases the purchasing power of foreign visitors to the U.K., and should boost the country’s popularity as a tourist destination,” said Maja Rakic, Bloomberg Intelligence analyst. She compared the international ticket prices of luxury goods like the Burberry trench coat to show that that the purchasing power of yuan-earners -- who are the world’s most enthusiastic luxury shoppers -- is strongest in the U.K.

To contact the reporter on this story: Thomas Seal in London at tseal@bloomberg.net. To contact the editors responsible for this story: Eric Pfanner at epfanner1@bloomberg.net, Isobel Finkel

©2017 Bloomberg L.P.

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