Debate rages about Britain’s exit from the European Union (EU) and the implications for financial markets and the global economy. Australian investors, however, should focus on micro concerns: whether to buy beaten-up, Brexit-affected stocks.

Wealth management stocks such as UK-based fund manager, Henderson Group, and BT Investment Management, which earns almost two thirds of its revenue in the region, fell more than 10 per cent on Monday. Both have tumbled from their 52-week highs.

CYBG Plc’s Chess Depositary Interests (CDIs) on the ASX were also hammered on Monday. This column has favoured CBYG since its demerger from National Australia Bank in February. It has performed strongly in the past few months after better-than-expected efficiency gains.

Macquarie Group, another with strong UK exposure, lost almost six per cent on Monday as investors bet on a slowdown in managed funds inflows and deal making in the region. Macquarie and CYBG both recovered slightly as global equity markets stabilised.

The British exit (Brexit) referendum result also affected several ASX-listed Australian Real Estate Investment Funds (AREITs). Around 30 per cent of Westfield Group’s assets under management are in Europe; Goodman Group has just over a fifth of its assets there; Lend Lease Corporation has 10 per cent.

Westfield and Lend Lease were slightly lower after Brexit. Goodman Group was a touch higher. I’m surprised the falls were not larger given the potential for Brexit to dampen consumer confidence in Britain and weigh on retail sales and shopping centre tenancies.

Other Australian stocks affected, to varying degrees, include Amcor, Ansell, Brambles, Computershare, Cochlear, ResMed, IRESS, Domino’s Pizza Enterprises, QBE Insurance Group, News Corporation, Sims Metal and SAI Global.

Brexit is bad news for Australian companies with high UK exposure on two fronts: it could hurt demand for their products in the UK; and a lower pound reduces the translation of earnings back into Australian dollars.

Gold’s medium-term prospects brighten

Gold was the big winner from Brexit. It rallied from US$1,260 an ounce to US$1,316 after the ‘Leave’ campaign prevailed, as investors flocked to gold’s safe-haven qualities.

Like many, I expected the ‘‘Remain’’ campaign to prevail and for the gold price to retreat after strong gains this year – an incorrect view outlined in last week’s Super Switzer Report. The story highlighted my medium-term bullishness on gold and nominated Evolution Mining, which leapt on the Brexit news, as the preferred gold equities exposure, so it was not all bad.

I still prefer to add gold exposure at lower prices and there may be an opportunity as markets digest this huge Brexit event and initial fears start to fade. Gold still looks like a good bet over the next few years; it’s more a matter of buying in during periodic bouts of weakness.

I expect a modest sell-off in gold in coming days or weeks as markets realise Brexit is not the spark for the next global financial crisis.

What Brexit means

In truth, nobody knows for sure how Britain’s exit from the EU will affect its economy, the global economy or financial markets. A lower pound should stimulate British exports in time, but it’s hard to find too many positives from such a fundamentally bad decision.

I do not see Brexit as another Lehman Brothers event that will trigger a financial market meltdown and global recession. Central banks in Britain, Europe and the United States seem well prepared for Brexit and the Reserve Bank has scope to cut our rates further.

Moreover, Brexit will take years to negotiate and implement. I suspect the UK will opt for the least disruptive path to exit the EU after this week’s early panic from the shock Brexit vote. Heavy falls in global equites after Brexit, and subsequent stabilisation, suggest markets have priced in much of the bad news, but expect poor sentiment to linger for some time.

However, one should not understate the fallout from Brexit. It will hurt British trade, its financial sector and labour market mobility, and shrink its economy a little in the long run. And that’s before a possible break-up of Britain if Scotland’s secession push has renewed momentum and as other European countries inevitably look to leave the EU. A domino-effect of European countries leaving the EU will create much uncertainty and is yet another challenge for the global economy.

UK recession is a possibility as consumer and business confidence falls, and businesses delay investment, although the region is a small export destination for Australian companies these days (it is still an important destination for Australian investment, and vice versa).

My main concern is Brexit reducing the appeal of the British banking sector. I was bullish on UK banks and outlined that view in several columns on CYBG for the Super Switzer Report this year. But regulatory and sovereign risks for British banks have risen post Brexit and lower consumer or business activity could weigh on bank earnings and funding costs.

Stocks to watch

In spite of these reservations about UK banking, I’m sticking with CYBG as a preferred mid-cap banking exposure. Like most demergers, CYBG has new momentum now that is not the problem child within the much larger National Australia Bank.

Make no mistake: CBYG is highly affected by Brexit. All of its revenue comes from the UK and its Northern England retail operations are leveraged to consumer sentiment. Brexit will probably result in softer economic conditions in the UK, slower growth in bank lending, and higher funding costs for CYBG, which owns the Yorkshire and Clydesdale banks.

CYBG has fallen from a high of $5.81 in late May to $4.11. Lingering weakness in CYBG in the next few weeks would not surprise as the market digests the fallout from Brexit on UK bank stocks.

The good news is that CYBG, more than other banks, has scope to cut costs and redouble its productivity efforts to offset the Brexit fallout. At $4.11, CYBG looks slightly undervalued on several broker forecasts and would look a lot more interesting below $4, or if it heads towards its $3.69 issue price on lingering Brexit fears.

Chart 1: CYBG Plc (CDI on ASX)

Source: Yahoo Finance

Macquarie Group is another Brexit opportunity. It fell almost six per cent on Monday, despite earning less than a quarter of its revenue in Europe. Operationally, Macquarie’s latest earnings result impressed and it is a key beneficiary from a lower Australian dollar in the next 18 months, given that more than half of its revenue is earned overseas.

Heightened global volatility and lower deal flow could weigh on Macquarie’s earnings and those of investment banks generally. But Macquarie has a demonstrated capacity to navigate treacherous market conditions and profit from volatility. And it was among the early improvers as global markets began to stabilise this week post-Brexit.

Most brokers have buy or hold recommendations on Macquarie, according to consensus analyst forecasts. Morningstar’s fair value for Macquarie at $89 a share compares to the current $67.91 price. Expect brokers to downgrade their valuations a touch after Brexit, but it is likely the market has over-reacted with Macquarie given the extent of recent falls.

Chart 2: Macquarie Group

Source: Yahoo Finance

I am tempted to add the wealth manager, Henderson Group, to this list. I thought it looked undervalued in the lead-up to Brexit as its shares fell (and based on the Remain vote prevailing). After rallying in the past few years, Henderson has fallen from a 52-week high of $6.56 to $3.70.

Chart 3: Henderson Group

Source: Yahoo Finance

Its managed funds have good record of market outperformance – a precursor to stronger fund inflow and earnings. Although Henderson looks undervalued on most broker forecasts, I’m concerned about the potential of global asset managers allocating fewer funds to UK equities, and higher fund outflows. That, in turn, would hurt Henderson’s assets under management, margins and profits. Henderson is too much of a Brexit casualty to take a contrarian view on, for now.

The same could be said of BT Investment Management, another Australian wealth manager with high UK exposure through its impressive J O Hambro Capital Management subsidiary. Like Henderson, BT has been a stellar performer over three years, but Brexit will weigh on a chunk of its earnings. Speculators might capitalise on Henderson’s and BT’s recent price falls; long-term portfolio investors should watch and wait for better value.

• Tony Featherstone is a former managing editor of BRW and Shares magazines. The information in this article should not be considered personal advice. The article has been prepared without taking into account your objectives, financial situation or particular needs. Before acting on the information in this article you should consider the appropriateness of the information, with regard to your objectives, financial situation and needs. Do further research of your own or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at June 29, 2016.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.