Credit Suisse sees 30% chance of 'Brexit lite', recommends buying UK dollar earners

“We have a 30% chance of a second referendum which would take place if Boris Johnson is able to negotiate better terms (i.e. a brake on EU immigration),” the bank said.

It pointed out that Johnson suggested back in February that the point of the first referendum was to get better negotiating terms for a second referendum.

However, a very protracted divorce is the more likely scenario, CS said, where the UK does not trigger Article 50 for a long time.

“Legally, it seems hard for Europe to force the UK out of the EU if the UK does not invoke Article 50,” said the bank, adding that German Chancellor Angela Merkel appears to favour a slower exit than many of her European peers.

In addition, CS pointed out that predictors of UK GDP growth such as vacancy growth and service sector PMI are already consistent with a mild recession. The bank said it remains “gloomy” on the outlook for UK growth, pointing to the high likelihood that corporates will postpone investment decisions.

However, the bank was a little more upbeat on Europe, where it reckons the direct impact of a UK recession should take around 0.5% off pan-European growth at worst.

As far as sterling is concerned, it continues to target $1.20 into a full Brexit, and $1.30 into ‘Brexit lite’. CS argued that the UK has the worst twin deficit in the OECD, which foreign direct investment is critical to fund.

With its negative view on sterling, the bank recommended investors buy UK dollar-earners such as Shire, Wolseley, Senior, Experian, UBM, Carnival and Smiths Group.

Credit Suisse said EURUSD was a lot more resilient that GBPEUR and would look to buy the European earnings in the UK, such as Shanks Group, Man Group, Vodafone and Bodycote, among others.

“The simplest way to address UK-related concerns is to be overweight FTSE 100 versus small cap. Small caps tend to underperform as PMIs fall or sterling falls: they have triple the domestic exposure of large and greater cyclical exposure.”

As far as sectors are concerned, it recommended pharmas, saying they were the cheapest defensive, dollar-earners and top of its macro scorecard. “We can see pharma is a play on sterling, the best performing sector when UK PMIs falls, and it trades on a big yield premium. Pharma stocks are defensive also because they have low leverage and strong self-help stories.”