The debate over whether the UK will exit the EU has switched dramatically to the potential gains for some Irish shareholders and most Irish exporters should the so-called ‘Bremain’ side win the looming UK vote on EU membership on June 23.
Financial markets yesterday reacted to opinion polls, and to bookmakers’ odds, which suggest the ‘Remain’ side in the British campaign is building a considerable lead.
Paddy Power quoted odds of 1 to 8 yesterday that the referendum would result in the UK staying in, as the probability of the Remain side of winning climbed to almost 90% from an 80% chance in less than a week.
The probability of the ‘Leave’ side winning next month has sunk to a probability of close to 18%.
“There has been a big shift in less than a week. Money is piling on ‘Remain’ as opinion polls give the ‘In’ a boost,” said bookmaker Feilim Mac An Iomaire.
Investec Ireland said that the bookies’ odds were driving sterling, which had climbed against the euro “after another sharp, surprise upward move” this week.
Sterling rose further, to 75.83 cent, close to a new four-month low. A weak euro tends to help Irish SMEs sell into Britain. Merrion Capital analyst Darren McKinley said a number of Irish stocks most exposed to the UK earnings such as Bank of Ireland, Ryanair, ferry company Irish Continental Group, and Fyffes may be poised to gain from a UK vote to stay in.
Fears of a Brexit had raised fears that sterling would sink after June 23 and therefore hit the shares of Irish companies that most rely on generating sterling earnings in Britain.
“We recommend that clients look at adding exposure to higher ‘Beta’ names such as Ryanair, Bank of Ireland, Permanent TSB, Independent News and Media, Fyffes, Applegreen, and Irish Continental Group while reducing exposure to the companies that have held up recently or have bounced but remain under specific pressure such as Hibernia REIT, Origin, Total Produce, Dalata, Kerry Group, Paddy Power, and Green REIT,” said Mr Kinley.
Ryanair shares have been under pressure because it earns a chunk of its earnings from Britain. Chief executive Michael O’Leary has been a prominent campaigner in Britain, appearing on BBC shows to press the case for the UK to stay in the EU.
Bank of Ireland through its joint venture with the British Post Office could be exposed to any potential drop in sterling if the Brexit side were to win; while Irish Continental and Fyffes also rely to a significant extent on earnings in sterling. Now, such stocks could benefit if the UK votes to stay in the EU.
“But (we) ultimately think that the Iseq will test recent highs offering about a 7% upside so focus should be on picking up stocks that have underperformed,” Mr McKinley said.
Capital Economics in London said if the UK votes to stay in the EU, it expects “a kneejerk strengthening in financial markets” of UK assets “although any rise in the pound might be short-lived”.
“The (UK) economic recovery would quickly get back on track, although any rebound would be limited by the fact that not of all the recent slowdown reflects Brexit concerns.
"And an interest rate rise before the year-end would come back onto the agenda,” the economists said. Meanwhile, S&P Global Ratings said sterling risked its reserve currency status if the UK voted for Brexit.
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