One word can neatly summarise the feeling among investors after the 24 June referendum. Uncertain. That’s because the future performance of the UK economy is now likely to be different to how it appeared on 23 June, with many investors seeking out defensive, international companies in the weeks following the referendum as they adopt a more risk-off attitude.
One of the best companies in that space is British American Tobacco (LSE: BATS). Its sales and profitability are extremely consistent and that’s a key reason why its shares have surged 15% since the referendum result was announced.
A key reason for its consistency is the price elasticity of demand for cigarettes. Tobacco is obviously an addictive product and so it’s highly price inelastic, meaning demand won’t change significantly even if price rises are large. This allows British American Tobacco and its sector peers to raise prices in order to increase sales and margins, with tremendous scope to continue to do this in the long run.
Furthermore, it has a sound balance sheet and excellent cash flow. This means that at a time when investors may be nervous regarding the viability of companies in their portfolio, British American Tobacco stands out as a highly defensive play, with growth potential in the increasingly lucrative e-cigarette space.
International focus
Also offering FTSE 100-beating potential in a post-Brexit world is Anglo American (LSE: AAL). It’s much more dependent on the economic performance of China and other emerging economies than on the effects of Brexit in the UK. As such, it could prove to be an ideal hedge against weakness in the British economy, with Anglo American’s recent restructuring having the potential to boost its profitability in the long run.
As well as cutting costs, Anglo American has streamlined its divisions to create a leaner and more efficient business. This should aid future growth, while a more stable outlook for commodity prices is now expected to result in a rise in Anglo American’s earnings of 32% in the next financial year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.7 and with it having a sound asset base, it could prove to be an excellent buy right now.
Low borrowing costs
Meanwhile, National Grid (LSE: NG) has outperformed the FTSE 100 by 13% since the EU referendum. It would be of little surprise for this trend to continue as investors seek out more defensive stocks.
Furthermore, despite interest rates being held at 0.5% yesterday, it seems likely that the Bank of England will retain a dovish stance over the medium term. Similarly, US interest rate rises may be pegged back somewhat over fears surrounding Europe. This low interest rate environment would be good news for highly indebted companies such as National Grid, since it would mean their borrowing costs would remain relatively low. And with National Grid yielding 4%, it should remain a popular stock among yield-hungry investors in a post-Brexit world.
