On June 24th last year, the UK voted to leave the EU – an unexpected result which sent shockwaves through the markets. In the immediate aftermath, sterling plunged in value – against both the euro and the dollar – and there was a more short-lived fall in the FTSE 100.
But 12 months on, the effects have not been as devastating as many people feared, with many investments benefitting from a ‘Brexit bounce’.
Below we look at the main winners and losers – and ask what the longer-term effects may be as the UK starts to negotiate the terms on which it will eventually leave the EU.
Jason Hollands, managing director of business development at Tilney, said there have been two major consequences of this vote to leave: weaker sterling, and higher inflation.
This fall in sterling has been significant: a year on the pound is down 13.8% against the dollar and down 12.5% against the euro – although in both cases it has lifted off its lowest points. This has contributed to rising inflation.
These twin factors have had a strong bearing on which assets, sectors and funds, have benefited or not from the decision to leave the EU.
What Were the FTSE’s Big Winners?
After an initial sell-off, the UK stock market rebounded and has had a strong year – with the FTSE 100 up 22.6% over the last 12 months.
As has been widely reported, many of the large multinational companies who derive much of their earning overseas have benefitted from a weaker pound. Given this it is not surprising that the FTSE 100’s top performing companies include Glencore (GLEN), up 82.5%; Antofagasta (ANTO), up 74.9%, Coca-Cola HBC (CCH) up 73.2% Intercontinental Hotels (IHG) up 64.1% and HSBC (HSBA) up 61.5% derive the lion’s share of their earnings overseas. Of course, Brexit isn’t the only factor in these stellar returns. The top-two performing stocks; Glencore and Antofagasta, have also benefited from rising commodity prices.
Conversely, companies that have struggled, such as Travis Perkins (TPK), Next (NXT), Kingfisher (KGF) and Dixons Carphone (DC.) – which saw their share price fall between 15% and 30% over the year - are more reliant on UK domestic demand. This has been potentially weakened following higher inflation.
But it isn’t just the FTSE 100 that is a tale of two halves: Laith Khalaf of Hargreaves Lansdown says it is not surprising that the FTSE 100 has outperformed the more domestically-focussed FTSE 250 over the past year. But what been more surprising is that the best performing part of the UK market has been the FSTE Small Cap market: up 26%, compared to the 22% rise in the FTSE 100.
Khalaf says: “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.” But Khalaf point out this is still a very strong showing – and demonstrates the UK economy remains buoyant despite dire warning prior to the Brexit vote.
Darius McDermott, managing director of Chelsea Financial Services says that when it comes to UK-based funds it is actively managed funds investing in smaller companies that were the clear winners. The best performing UK funds was Old Mutual UK Smaller Companies Focus, up 55.46% over the year, and TM Cavendish Aim, up 51.18%.
Europe Outperforms UK
It remains to be seen who will get the upper-hand in the forthcoming Brexit negotiations. But it’s clear that the pending divorce hasn’t dented the performance of European investments.
Darius McDermott, managing director of Chelsea Financial Services, said: “UK equity markets may have reached all-time highs, but European markets have done even better. “With so much uncertainty still ahead of us, it is quite possible this trend will continue in the short term at least, especially as European markets are less overvalued and many of their economies look to be in better shape. Positive growth numbers on the continent are coming into focus now some of the contentious national elections are out of the way.”
The outperformance is quite significant: while the FTSE 100 is up 22%, the MSCI Europe index is up 38% over the year. The French index (CAC 40) is up 40%, while the German Dax 30 index is up a staggering 43%.
The UK stock market may have performed well over the past year, but it still lags behind other global markets, with the US S&P 500 up 38.2% this year, the Japan Topix index, up 41.4%, and the MSCI Emerging Markets Index up 45.2%.
It is difficult at this stage to untangle whether this is because of Brexit, or whether returns would have been substantially lower without the currency fuelled “Brexit bounce”.
Cash Savers Biggest Losers
Looking away from equities, it is clear risk-averse savers continue to suffer, and the after-effects of Brexit have only worsened their plight.
Hollands says: “Rising inflation should also be a worry for the UK’s cash savers who have already had to endure years of derisory interest rates.” But he points out that many bondholders could also be hit. “This would include investors holding fixed income investments where yields remain very low, for example 10-year gilts are currently yielding just 1.00%.
“Holding investments that do not generate inflation-beating returns means the real value of these assets will be eroded over time and so savers and investors need to consider inflation-proofing portfolios through the inclusion of real assets such as gold, risk assets such as equities, and areas like infrastructure where long-term contracts often include inflation-proofing.”
Corporate bond investors haven’t gained from Brexit, but they haven’t lost too much either. McDermott says: “Bonds have just continued to go either sideways, or return very small positive returns. Yields have remained stubbornly low. Corporate bonds had a bit of a boost from more QE after Brexit, but it is hard to see much value in bonds and we remain cautious about this sector.”
It is interesting to note that some bond managers – such as Jim Leaviss, head of retail fixed interest at M&G – have decreased their exposure to sterling bond increase weighting to US fixed interest holdings. Leaviss says: “Within bond markets my favoured exposures include US dollar-denominated floating rate bonds from blue-chip banks and financial issuers, largely as a play on the strengthening US economy and rising US rates.”
Commercial Property Fallout
One of the first casualties of the Brexit vote was commercial property funds. Most closed these funds, or introduced pricing penalties to deter withdrawals. These restrictions were generally removed within six months. Although the sector has had a more volatile 12 months, most funds have ended up in positive territory a year on from Brexit. Of the five funds of 48 that are down on the year, losses are modest: between -0.5% and -3.13%.
McDermott says: “The gating of property funds post-Brexit was seen very negatively but I think it was the right thing to do and it worked: it stopped investors from panic selling and crystallising some significant short-term losses.
“Yes, it was frustrating for those needing to access this money. But investors in these types of fund should be long-term investors with cash holdings for emergencies.”
