Brexit one year in - winners and losers in financial markets
Friday marks the one year anniversary of the day Britons went to the polls and surprised themselves, and financial markets, by voting to leave the European Union. Since then the pound has sunk, the stock market has risen and Brexit talks have finally begun. Below is a summary of the performance of key financial markets and indicators since the referendum last June.
- Strong Footsie performance is overshadowed by international markets
- Small cap index beats blue chips
- Chances of an interest rate rise slashed
- Cash ISA rates halve
- FTSE 100 gets even more concentrated in mega caps
- Best and worst performing Footsie stocks
Laith Khalaf, Senior Analyst, Hargreaves Lansdown:
‘The main financial effect of Brexit has been felt in the pound, though weaker sterling has pushed up inflation and also boosted the stock market. Holidaymakers have probably been the most obvious losers from Brexit so far, though inflation is also gradually ratcheting up the pressure on consumers more broadly.
This dynamic is playing out in the stock market too, with companies either directly or indirectly servicing the domestic consumer suffering since the vote. Dixons Carphone, Travis Perkins and Berkeley Group are three companies who can attribute a large part of their relegation from the benchmark FTSE 100 index to concerns over consumer demand stemming from Brexit.
It seems like a long time ago now, but commercial property funds also had a torrid time in the wake of the Brexit vote, as high levels of withdrawals led to trading being suspended in several multi-billion pound funds. The sector has since regained its composure, though the episode served to reiterate the significant drawbacks of investing in open-ended commercial property funds.
Overall the UK stock market has performed very strongly since the EU referendum, though it’s actually a laggard compared to the return UK investors have received from overseas markets. That’s because weaker sterling has been one of the key drivers of the Footsie, and that currency boost is even more powerful for overseas markets, when returns are converted back into pounds and pence.
This currency effect is also reflected in the performance of the different strata of the UK stock market, with the big international blue chips of the FTSE 100 outperforming the more domestic midcaps. However the FTSE Small Cap index has surprisingly returned more than the FTSE 100. On the face of it this may seem like a sign of the strength of the domestic economy, however the headline small cap index is heavily populated with investment trusts, many of which invest in overseas equities. Stripping out the performance of these trusts leaves the small cap index lagging slightly behind the FTSE 100 since Brexit, still a very strong showing, but worthy of only second place on the podium.
UK government bonds have continued to eke out a pretty decent return for investors, despite legitimate concerns that these bonds are in bubble territory. The residential property market has been somewhat disappointing against the backdrop of more robust growth in recent years, though younger savers working hard to keep pace with house prices might breathe a sigh of relief that the treadmill has slowed slightly. Gold has also seen its star rising for UK investors, but this is almost all a function of weaker sterling; in dollar terms gold is trading at roughly the same price it did on referendum day.
Cash returns meanwhile continue their limbo dance, and remarkably the typical rate cash ISA rate has halved from the already low level of 0.8% last June, thanks to the Bank of England’s interest rate cut following the Brexit vote. Meanwhile an interest rate rise by the end of this year has gone from being a shoo-in to an outside shot, despite the recent appearance of some hawkishness within the Monetary Policy Committee. The resurgence of inflation makes the low interest rate environment even more punitive for cash savers because their money is losing its buying power even faster.
A year after the referendum, Brexit talks have now finally begun, which may cause some to reassess their investment strategy. However, the performance of capital markets over the last year tells us that the financial effects of Brexit are about as predictable as the British weather. Investors should therefore stick to proven means of building up a decent nest egg, by squirrelling away as much as possible, maintaining a diversified portfolio, and using tax shelters to protect profits from the taxman.’
UK and international markets
|Total return||Value of £100 invested|
|FTSE Small Cap||26.0%||£126|
|FTSE Small Cap (without investment trusts)||21.1%||£121|
|MSCI Europe ex UK||38.9%||£139|
|CAC 40 (France)||40.7%||£141|
|DAX 30 (Germany)||43.7%||£144|
|MSCI Emerging Markets||45.2%||£145|
|FTSE Actuaries UK Gilts||6.2%||£106|
|Moneyfacts Average Instant Access Account||0.3%||£100|
|UK Nationwide House Price Index||2.4%||£102|
|UK Consumer Price Index||2.9%||N/A|
Source: Thomson Reuters Lipper, income reinvested, 23/06/2016 to 20/06/2017
Currency, gilts and interest rates
As has been well documented, the pound has suffered heavy falls since Brexit. Likewise cash rates have fallen further from already exceptionally low levels, and the chance of an interest rate rise by the end of this year has been significantly downgraded. The fall in interest rates will be particularly keenly felt by cash savers because of the simultaneous increase in inflation, making their cash income even more stretched in terms of what they can buy.
|23rd June 2016||20th June 2017|
|Chance of UK interest rate rise by 2018||86.1%||20.4%|
|10 year gilt yield||1.4%||1.0%|
|Average cash ISA||0.87%||0.41%|
Source: Bloomberg, Bank of England
FTSE 100 top 10 performers
All of the top 10 performing stocks have significant international earnings which have helped propel their stock price performance thanks to weaker sterling. There are other factors at play too however; for instance commodity producers Glencore and Antofagasta have benefited from price rises in the stuff they dig out of the ground, and Ashtead has been given a leg up by hopes that President Trump will push through a US construction splurge.
The bottom of the performance table also has a Brexit flavour to it, with the retailers, ITV, and Travis Perkins all suffering from Brexit blues. Indeed the companies highlighted in red have all been relegated from the FTSE 100 index since last June. However, some of the factors at play here are nothing to do with Brexit. BT has faced an accounting scandal in its Italian division and an OFCOM fine, and while belt-tightening may have hindered Capita’s performance, there have also been problems with some of its contracts (notably Transport for London and Co-op Bank) and a questionable sale of Capita Asset Services to shore up the balance sheet, all of which has led to the CEO stepping down. Meanwhile Hikma has been hit by delayed failure to get US approval for its generic version of the blockbuster drug Advair.
Overall while Brexit, and particularly the fall in the pound, has set the tone for market performance, there have still been plenty of other factors which have played their part in stock price movements. And while domestically focussed stocks have undoubtedly been hit by Brexit, many have seen a significant bounce in their share prices since the days and weeks immediately following the referendum, when there was even greater concern around the fate of the UK economy.
The table below is based on the constituents of the FTSE 100 as they stood on 23rd June 2016.
|Top risers||% Total Return||% Price change|
|Coca-Cola HBC AG||73.2||69.4|
|3i Group PLC||65.7||60.4|
|InterContinental Hotels Group PLC||64.1||55.0|
|Burberry Group PLC||63.1||58.3|
|HSBC Holdings PLC||61.5||51.5|
|Ashtead Group PLC||55.0||52.2|
|Top fallers||% Total Return||% Price change|
|Royal Mail PLC||-14.6||-18.4|
|Mediclinic International PLC||-16.9||-17.3|
|Travis Perkins PLC||-19.2||-21.5|
|Hikma Pharmaceuticals PLC||-26.8||-27.8|
|Dixons Carphone PLC||-27.5||-29.5|
|BT Group PLC||-32.5||-34.9|
Source: Bloomberg, total return is with income reinvested, 23/06/2016 to 20/06/2017
FTSE 100 juices are quite concentrated
Since 23rd June 2016 the Footsie has risen by 18% (without dividends because it is a price index). It is worthy of note that half of this rise can be explained by the performance of 7 companies (listed below).
- HSBC Holdings PLC
- British American Tobacco PLC
- Royal Dutch Shell PLC
- AstraZeneca PLC
- Glencore PLC
- Diageo PLC
- Unilever PLC
The strong performance of the mega caps has led to further concentration of the benchmark index in the very biggest stocks. The biggest 10 stocks accounted for 42.7% of the index on 23rd June last year; they now account for 46.1%. Or to look at it a different way, half of the index by weight used to be comprised by the biggest 14 companies, it’s now comprised by the biggest 12. There’s no doubt the index was already concentrated, but it’s become more so as a result of market movements since the EU referendum.
The result is, for the time being at least, movements in the headline FTSE 100 index will be even more heavily influenced by the performance of the big stocks at the top. Nor does the UK’s headline index include dividends, which as we know are a key source of stock returns. So while the day to day movements of the index may still serve as a quick litmus test of market sentiment, the headline FTSE 100 index is not always a good barometer of the fortunes of the UK economy, or indeed the typical UK investor.