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When David Cameron and the Conservative party campaigned for an EU referendum in 2015 it was then difficult to envisage the scale of the chaos it would cause. The UK voted to leave Europe by a slender margin of 52% to 48%.
In the first few hours following the announcement of the results global markets panicked. The Guardian claimed that the vote wiped out a colossal two trillion USD off the global market in the first few hours of trading following the vote. But what happened to the FTSE 100? The index composed of companies listed on the London Stock Exchange with the highest market capitalisation and commonly considered the main benchmark of the UK economy? The exact opposite. The FTSE 100 jumped following the Brexit vote and by December of 2016 Britain’s blue-chip share index closed at a new all-time high, closing the year up 14.42 percent and adding about £232bn to the value of companies listed.
So why did the FTSE 100 rally following a vote which wiped 2 trillion USD? Well, it’s quite simple. As the value of Sterling plummeted the night of Brexit the overseas markets jumped at the opportunity to purchase what was considered under-valued UK based stocks. The record close meant the FTSE was Europe’s best performing major stock market in 2016.
Billions pouring into the UK stock market sounds on the face of it extremely good news for the UK economy, but the reality was somewhat different. The composition of the FTSE 100 is mainly multinational companies that are listed on the LSE (London Stock Exchange) but who operate globally. The vast increase in demand and subsequent trading of LSE listed stocks has no immediate financial benefit to the company itself as the profits of the trade are passed to the former shareholder.
When looking at how Brexit has affected the UK economy, analysis of the FTSE 100 is arguably not the strongest indicator. The FSTE 250 which comprises of the 101st to 350th largest companies trading on the UK stock market (the London Stock Exchange) offers a wider and more localised representation of the British economy. The FTSE 250 has a larger number of firms that exclusively trade within the UK.
So, what happened to the FTSE 250?
The FTSE 250 fell 13% in two days after the vote. We are of course now the three-years on from when the UK voted to leave, so what has happened to the UK indices since?
The FTSE 100 continuously grew for around two years following the Brexit vote. In 2018 however, the FTSE 100 saw its worst year in a decade, with the Guardian claiming ‘economic worries, Brexit uncertainty and the trade war between the US and China all spooked investors’. Again, with the FTSE 100 being more sensitive to the international market place the global tensions most notably between the US and China had perhaps more of a significant impact.
So, what about the FTSE 250 and the local index?
Since the Brexit vote, ‘FTSE 250 companies have struggled versus their large and small-cap peers. Has the “sweet spot” permanently soured?’ (1). Why this is the case has to do with what we have touched upon before in the article the “Mid-caps are more focused on the domestic UK economy. While the companies in the FTSE 100 generate three-quarters of their earnings internationally”.
So the general picture for the UK economy in a broader sense is Brexit is certainly causing UK mid-cap companies who operate predominantly domestically to struggle somewhat whilst the MNC’s linked with the FTSE have capitalised on the weakness of Sterling and the overall uncertainty in the market place.
Of course, the weak sterling does present the opportunity for UK based businesses. The weaker sterling makes UK exports significantly more competitive for foreign buyers and may incentivise UK businesses to prioritise overseas trade in the short term. The knock-on effect of this? Higher prices for UK consumers. Moreover, the weakness of Sterling from Brexit also means imports to the UK become slightly more expensive.
If Brexit does eventually materialise the true trade impacts will be measurable depending on the agreements (if there are any). For now, the uncertainty will continue to create highly volatile conditions on both the strength of Sterling and within the FTSE indices. An element of stability is arguably inevitable when the negotiations conclude, until then, the uncertainty from Brexit will likely continue to have a negative impact on UK based shares and the value of Sterling.