British stocks get skittish after the Brexit vote

Banks, house builders and airlines tanked following Britain's EU referendum. Is it a buying opportunity?

Investors have voted with their wallets since the result of the referendum emerged on Friday, dumping shares heavily exposed to the UK economy and buying those with sales in America. This has piled pressure on banks, housebuilders, estate agents and airline stocks.

More than $140bn has been wiped off the value of British companies in the FTSE 350. UK banks are the hardest hit, mounting a modest rally on Tuesday, after seeing worse one-day falls than during the height of the banking crisis in 2008. Lloyds fell 29%, while Barclays is down by a third. Smaller banks hoping to steal market share saw even deeper losses, with Aldermore and Virgin Money almost cut in half. Asset managers, currently able to "passport" their products into the EU, also suffered a swift sell-off. Rathbones, Aberdeen, Schroders and Henderson have all fallen by 17% to 28%.

Some banks have set up hotlines to handle mortgage queries, as the possibility of falling house prices threatens to derail new applications. House-building stocks were badly hit, with Barratt, Persimmon and Taylor Wimpey all losing more than 40%. Companies selling materials to the building trade likewise tanked, with Travis Perkins opening 40% lower after the result on Friday morning. "Confidence in house prices is suddenly anybody's guess," says Nils Pratley in The Guardian.

For estate agents, a 10% drop in prices spread out over two years would halve profits, according to analysts at Bank of America. Foxtons, which is focused on London, has lost more than 40% of its value, pushing its shares to an all-time low. Directors at property groups who sold stock in the days before the referendum suddenly look very shrewd. Simon Silver, who co-founded office developer Derwent London, sold £1m of stock a week before the vote, while Matthew Ingle, the chief executive of kitchen maker Howden Joinery, cashed out to the tune of £6.8m in May. Both firms fell by more than a third in the two days after the referendum result.

Britain's changing relationship with the world was all too visible in airline stocks. IAG, which owns British Airways, used the mayhem to sneak out a profits warning, falling 36%. But carriers focused on short-haul flights were the hardest hit, as the falling pound makes jetting off abroad more costly. Britain's inclusion in the Open Skies agreement, which allows airlines to use any EU airport, is up for renegotiation, potentiallyforcing easyJet to shift its headquarters from Luton to mainland Europe. Its shares are down nearly 40%.

Still, big swings in the currency market pushed some firms higher. Every cent the dollar moves against the pound adds around £20m to Rolls-Royce's earnings, according to JPMorgan, because its manufacturing footprint is tilted towards Britain, while its earnings are largely priced in US dollars. Shares in Rexam, which makes drinks cans, primarily for the US market, have also risen. Cambridge-based chipmaker Arm Holdings was the only other stock in the FTSE 100 to end Friday in positive territory.

Indeed, high-quality stocks with steady, predictable cash flow, from Unilever in the FTSE 100 to James Halstead on Aim, have become more expensive. Utilities, drugs and tobacco groups have all done well, leaving investors with a binary bet on whether high-risk stocks, from banks to airlines, will quickly recover. Many investors were quick to react, piling into the market. Trading volumes spiked five-fold on Friday morning, according to brokerage AJ Bell, with banks and house builders the most heavily bought stocks.

It was an almost suicidal "Dunkirk moment" for small investors in the UK, says John Ficenec in The Daily Telegraph, who thinks the market will continue falling. Britain's foreign-exchange reserves of £100bn "will not last long" in the face of heavy selling of the pound. Nor is there much room for stimulus, with public-sector net debt already sitting at £1.6trn, equal to 84% of GDP. "If the pound keeps falling and the country imports too much, there will be no option but to raise interest rates to defend the currency."

All that could be overblown, says Lex in the FT. Investors who missed out on a strong run for UK equities should not try to get "cute" on timing. It is simpler to follow the motto of buying "on the sound of cannons". The hit to confidence may not be as bad as feared and the status quo, in terms of trade, will also prove stronger than investors imagine. With the pound reeling and the eurozoneat risk of fragmenting, aftershocks in the market are all but inevitable. Investors should stand ready, as prices get skittish.