- Health care, real estate and technology stocks seem to be among the top choices
- Divide over large and small companies
- Sectors heavily dependent on U.K. consumers, such as leisure and retail, will be unlikely to escape Brexit intact.
As London and Brussels discuss the terms of their divorce, investors are pondering where to put their money. But the answer is as divided as the British electorate over the decision to leave the European Union.
Health care, real estate and technology stocks seem to be among the top choices to navigate through Brexit, but financials and utilities might also offer attractive offers, investors have told CNBC. When it comes to companies' size, however, their answers are even more divided.
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"Large cap U.K. equities have traded primarily on sterling whereas small cap equities have been much less sensitive. The correlation between the MSCI U.K. index and the trade-weighted exchange rate is nearly 40 percent, whereas it's close to zero for small cap. So in terms of resilience you could cite small cap equities," Daniel Morris, senior investment strategist at BNP Paribas Asset Management, told CNBC via email on Thursday.
On the other hand, the investment strategy team at Citi bank said in a note that it's underweight in U.K. small and mid-cap equities. "Overall, domestics sectors are likely to weaken further even if a recession is avoided," the bank said, adding, "large-caps should be more defensive, with support from the average dividend yield of over 3 percent as well as 70 percent of revenues coming from overseas."
Julian Chillingworth, chief investment officer at Rathbones, also favors large over small firms. He told CNBC on Friday that anybody that doesn't have high sterling earnings is a good option because they will be more resilient to currency moves. He mentioned consumer defensive stocks as an example.
Above all, there seems to be some division among investors. Dan Collins, chief executive officer of CCO Global, told CNBC on Friday that it's "difficult" to choose between large and small companies. Whereas large companies can probably handle big shocks better because they have more and bigger resources, small companies have the advantage of being in a better position to understand legislation changes and being faster at adapting to a new framework, he noted.
"Opportunity comes with change," Collins told CNBC, noting nonetheless that "understanding what's going to happen to the U.K. is hard because the government itself doesn't seem to know either."
"There's no consistent plan," he added.
There's no such a thing as Brexit-proof sector
Health care, real estate and technology stocks were mentioned as the best options.
Robert Darwin, partner at Hogan Lovells, who follows mergers and acquisitions deals, told CNBC that pharma is the place to look at. "Britain's importance to the Life Sciences industry, and its status as a major player in global science, should mean that irrespective of Brexit, major pharmaceutical companies continue to see the UK as a key place to invest," he said.
Morris of BNP Paribas noted that "real estate has the lowest share of international revenues as a percent of total sales, so sterling would matter less to corporate profits. Consumer Discretionary and Financials are also below average for the index."
When it comes to technology, it is "the driving force of everyone's life," Collins from CCO said.
Banking stocks should also benefit from higher interest rates but life could be difficult for the financial services industry, which will relocate some operations from the U.K. to Europe, Chillingworth from Rathbones said. He added that sectors heavily dependent on U.K. consumers, such as leisure and retail, will be unlikely to escape Brexit intact.
Brexit has gotten investors split, with overseas money managers clearly moving towards European equities rather than U.K. ones. As Michael Browne, portfolio manager at Martin Currie, described, "I honestly don't see how we can find a Brexit proof sector."
"When you change your trading relationship and population movements with the world, it has to change everything from the cost and supply of labour, the cost of good (exchange rate) , the availability of market access (in and out), government finances (fiscal policy) or as we know very well monetary policy. You can find a stock, which for its own reasons does well or badly, within this but…," he wondered.
"Then throw in what sort of Brexit we are going to have? Here I do not mean the hard/soft debate but whether it's a capitalist or Socialist Brexit. A question made sharply important post the election of 8th June. And a socialist Brexit would change everything," he added.