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Brexit Effect works to Boost Diageo shares

Companies / BrExit Aug 25, 2016 - 04:50 PM GMT

By: Submissions

Companies

Alexander Bowring writes: After the referendum result was announced, Diageo CEO Ivan Menezes went on to say the decision was “better for the UK, better for Diageo and better for the Scotch whisky industry that we remain in.” This begs the question, why have Diageo’s shares risen dramatically immediately following the leave vote? Sitting at under £18 prior to the result, they jumped to almost £20 each, signalling a new high for the last 12 months.


As with all shares on the volatile stock market, the change is short term. When economic times are uncertain, investors prefer to hold their money in companies that pay a regular dividend, an area where Diageo shares have performed strongly before 2016. With a strong presence in many global markets, and all within sectors where consumers generally do not cut back on during hard times, the company is in a noticeably strong position. However, this is not the sole reason. Following the fall in the pound’s value, exports have instantly become cheaper, and since less than 10% of revenue for Diageo is from within the UK, this drop instantly benefits the profits they generate.

This change is not exclusive to Diageo shares, and other scotch producers will also benefit if they export a fair share of their production. Wine producers will also be in a strong position, assuming they export significantly, however if they import the majority, they will find the climate more difficult.

The lower pound will also effectively make Diageo’s debt comparatively cheaper, as the majority is valued in sterling. All these short-term benefits have directly impacted Diageo shares, helping stimulate the rise in value. However, this change shouldn’t have too much effect in the short-term.

Taking the above into consideration, the anxiety seen within the statement by Diageo CEO Mendez will materialise in the future. Once Article 50 is invoked, British companies only have a period of up to 2 years before severe changes are made. During this process a lot of announcements will be made, and the volatile nature of the stock market will be seen in full effect as investors react.

There are a lot of unknowns, and no one will know for sure whether UK producers will be able to export in the same manner as they do today. With trade deals being negotiated independently, it will create a lot of varying rules and regulations, and those currently in place may no longer be existent.

The term “Scotch Whisky” is one protected due to Geographical Indication, similar to Champagne. However, once “Brexit” takes place, will this remain? There is a lot of uncertainty, and while many believe that the reduced value of the pound may outweigh any potential long-term negatives, many believe Diageo shares and other similar Scotch producers share prices will remain volatile. All in all, when it comes to Diageo shares, it’s safe to say that things are up in the air and that there are many twists and turns likely to unfold before the post-Brexit market steadies.

Spreadbetting, CFD trading and Forex are leveraged. This means they can result in losses exceeding your original deposit. Ensure you understand the risks, seek independent financial advice if necessary. The value of shares and the income from them may go down as well as up. Nothing on this website constitutes a solicitation or recommendation to enter into any security or investment.

Alexander Bowring is a London based writer and a Southampton Solent University Screenwriting graduate. He has worked alongside TV personality and Telegraph feature writer Alison Cork, whilst also having produced content for ITV, This Morning, Canvas8, Who's Jack, Alison at Home, and Bonallack & Bishop Solicitors. Alexander also has a keen interest in investments.

Copyright © 2016 Alexander Bowring- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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