Following Brexit, the UK economys outlook has become much more uncertain. This doesnt mean a recession is inevitable, but it does mean investors may wantto seek out a wider margin of safety when investing in UK-focused stocks. Thats because theres a higher chance of downgrades to forecasts thatcould negatively impact on their share prices.
One company thatcould be hurt by a slowdown in the UK is Sainsburys (LSE: SBRY). It lacks international exposure and so a challenging economic period in the UK could cause a downgrade to its earnings outlook. In fact, the credit crunch showed that during a period of disappointing wider economic performance, many shoppers sought out no-frills operators such as Aldi and Lidl, with Sainsburys and other mid-market operators losing out.
While theres no guiaranteethat this situation will be repeated, Sainsburys share price could underperform in the meantime as investors become nervous regarding the prospects for UK consumers changing their shopping habits (again). However, since Sainsburys trades on a price-to-earnings (P/E) ratio of just 11.3, future problems appear to be priced-in. And its acquisition of Home Retail could lead to synergies thathelp support its growth, thereby making it a sound long-term buy.
Sound income stock
Similarly, Royal Mail (LSE: RMG) is highly dependent on the UK economy. Unlike Sainsburys though, Royal Mail has a European division thatscurrently performing well. And although theres scope for a slowdown in Europe as the effects of Brexit are unlikely to be solely confined to the UK economy, Royal Mail offers a wide margin of safety as well as excellent income prospects.
For example, it trades on a P/E ratio of 11.9 and with positive growth forecast in its bottom line for each of the next two years, it could continue to outperform the FTSE 100 as it has done by 7% since the start of the year. Furthermore, Royal Mail has a yield of 4.6% and having raised dividends per share at an annualised rate of 4.8% during the last three years, it remains a sound income stock. Due to the prospect of falling interest rates, this reliable income appeal could act as a positive catalyst and push Royal Mail shares even higher.
Short-term issues
Meanwhile, BT (LSE: BT-A) is also UK-focused and added to theuncertainty that currently brings with it is its ambitious expansion programme. This, of course, has included the acquisition of EE as well as major investment in its pay-TV offering and in its superfast broadband network. In tandem with this investment, BT has also slashed prices to increase its customersnumber. Although this will provide it with the scope to cross-sell productsin a quad-play world, it also means that BTs margins are likely to come under a degree of pressure.
In fact, BTs earnings are forecast to fall by 10% this year. Although positive growth is forecast for next year, investor sentiment could decline in the meantime. This means that while BT could deliver strong profit growth in the coming years, for now there appear to be better options available elsewhere.
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Peter Stephens owns shares of Royal Mail and Sainsbury (J). The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
