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Is Britain Headed for a Soft Brexit? 5 Picks

Swarup Gupta

On the night of Mar 13, the British House of Commons delivered another crushing defeat to prime minister Theresa May. Members of parliament voted to reject a no-deal Brexit. What’s more, a large chunk of May’s cabinet abstained from voting, leading to heightened concerns about the validity of her leadership.

Meanwhile, Britain’s chancellor Philip Hammond indicated in his Spring Statement that May would likely have to agree to a soft Brexit. This would be necessary to break the deadlock currently plaguing the British parliament. He also warned of dire economic consequences if a hard or no-deal Brexit ensues.

A soft Brexit would allow Britain to retain access to the European single market. This would protect London’s position as a global financial hub. Major multinationals would also then continue to base themselves within Britain. With a soft Brexit looking increasingly possible, it would make sense to bet on major multinationals based in Britain.

May Loses Brexit Vote, Faces Dissension

The British House of Commons initially voted 321 to 308 to reject a no-deal Brexit. Another vote followed and lawmakers bolstered their decision by 321 to 278, widening the slim gap to 43 votes.

The government’s motion stated that Britain should exit the EU without a deal on Mar 29. It would also have the option to undertake a no-deal Brexit at any other time. Of May’s ministers, 13 abstained with one voting against the party whip.

Now, on Mar 14, Britain’s parliament will decide whether it wants to delay a Brexit beyond the original deadline of Mar 29.  However, the delay will only take place if the House of Commons votes for May’s Brexit deal, a proposal which has been rejected twice.

This has caused great anger among legislators keen on a Brexit as well as those supporting its softer version. Instead, May’s defeat has given rise to the feeling that a soft Brexit, where Britain retains stronger links to the EU, is increasingly a possibility. 

Hammond Supports Soft Brexit, Touts Benefits

On Wednesday, Britain’s Chancellor Philip Hammond used his Spring Statement to indicate that May should now veer toward a soft Brexit. Hammond used the Spring Statement, an update on the British economy, to provide a largely upbeat picture. At the same time, he warned that a no-deal Brexit would not only result in short-term pain but could leave the country “less prosperous in the longer term.”

In the event of a soft Brexit, goods and services would be freely traded with EU members without attracting tariffs. Exports would not be subject to border checks. Britain-based financial firms would continue to enjoy the right to sell services and operate branches in the EU. Other non-members like Norway enjoy similar freedoms and continue to have access to the European Economic Area.

Further, a soft Brexit would help to release a so-called deal dividend of around £26 billion. Additionally, this would be money saved from the bills Britain currently pays to the EU. It could result in a £20 billion increase in funding to the National Health Service (NHS), according to the British government.

Our Choices

May’s latest legislative defeat and the rebellion among her party’s ranks indicate that a tougher, hard Brexit looks increasingly unlikely. As MPs prepare to vote on delaying the inevitable, a soft Brexit would be uppermost on their minds. This would enable Britain to endure a difficult phase in its history with the least economic strife possible.

A soft Brexit would allow British multinationals to retain their global headquarters within the country. It could also save the economy from most of its blushes. This is why it makes sense to invest in British MNCs. However, picking winning stocks may prove to be difficult.

This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score. 

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM Score.

Rio Tinto plc RIO is an international mining company, headquartered in London.

Rio Tinto has a Zacks Rank #1 (Strong Buy) and VGM Score of A. The company’s expected earnings growth for the current year is 23.8%. The Zacks Consensus Estimate for the current year has improved by 18.7% over the past 30 days.

Smith & Nephew plc SNN is a global medical device company.

Smith & Nephew has a Zacks Rank #1 and VGM Score of B. The Zacks Consensus Estimate for the current year has improved by 0.4% over the past 30 days.

Endava plc DAVA provides information technology services.

Endava has a VGM Score of B. The company’s expected earnings growth for the current year is 32%. The Zacks Consensus Estimate for the current year has improved by 4.7 over the past 30 days. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

AstraZeneca plc AZN is one of the largest biopharmaceutical companies in the world, headquartered in London.

AstraZeneca has a Zacks Rank #2 (Buy) and VGM Score of B. The Zacks Consensus Estimate for the current year has improved by 5.3% over the past 30 days.

British American Tobacco p.l.c. BTI is a manufacturer, marketer and seller of tobacco products on a global basis.

British American Tobacco has a Zacks Rank #2 and VGM Score of B. The company has expected earnings growth of 8.4% for the current year. The Zacks Consensus Estimate for the current year has improved by 2.5% over the past 30 days.

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