Half a decade after the UK voted to leave the EU, Schroders experts Sue Noffke, Rory Bateman and Azad Zangana examine the investment case for the UK stock market.
The -2.5% underperformance of UK real GDP growth relative to OECD countries over the last 4 years (to 31/12/2019) clearly signals the damaging impact Brexit has had on business confidence. Brexit uncertainty has led to slower investment, with firms instead building up cash buffers from ~16% up to ~19% of GDP. The opportunity cost of this saving is the slower rate of GDP growth experienced.
In 2019, 50% of the imports and 47% of the exports were traded with the EU27, which makes the EU27 market the UK’s largest trading partner. In 2006, both, the shares of UK exports and imports to the EU27, were at the maximum level; since then both shares are on a general downward trend, the exports more than the imports. Since the referendum in 2016, the exposure to the EU27 market did not significantly change from the perspective of the UK. Hence, especially as a supplier, the EU27 matter for the UK. For the EU27, the UK is much less important as a trading partner: in 2019, only 4% of total exports go to the UK and 6% of the total imports are from the UK, respectively. While the trade shares decrease between 2001 and 2007, they remain relatively stable thereafter. Since the referendum in 2016, we have seen a slight decrease in the trade shares with the UK.
UK’s equity market has trailed Europe’s considerably this year. The UK’s FTSE 100 Index is down over 20% while Euro Stoxx 600 Index is down just over 11% year-to-date in sterling and euros respectively. If we compare the two in Euros, the UK fares even worse on account of Sterling’s weakness relative to the Euro – another sign of the UK being hurt more by the risk of Brexit disruption and uncertainty.
London-listed stocks rallied yesterday as the pound sank, after Prime Minister Boris Johnson said that the UK will walk away from Brexit negotiations if a deal is not reached by mid-October.
Tristán de Borbón (London) | On March 2 the British government started to negotiate a free trade agreement with the EU… and to set out its goals for an agreement with the USA. A strategy that puzzles analysts.
JP Marín-Arrese | Those betting Brexit would take a heavy toll on Britain, discover much to their surprise that the EU stands as the first collateral casualty. The vacuum left in the budget by the UK departure has fuelled bitter acrimony between the Member States, especially in those receiving large amounts of Community money, like Spain. Its PM Sánchez has described the proposal tabled by the Council Chair as deeply disappointing.
Political uncertainty about the Brexit procedure caused the United Kingdom’s (UK’s) gross domestic product (GDP) to stagnate in the fourth quarter of 2019. However, the strong decrease in political uncertainty since the 12 December parliamentary election should allow the UK economy to rebound back to growth during the first quarter of this year, explains Janwillem Acket, chief economist at Julius Baer.
The chances of “getting Brexit done” reasonably quickly and smoothly have never been better.