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How have UK investors fared since Brexit so far?

Financial advice to support your saving

24 July 2018

3.5 minute read

June 23 marked the two-year anniversary since the UK voted to leave the European Union.

Two years on from the vote for Brexit, negotiations over the details of the UK’s departure from the European Union are underway.

A transition deal will begin on ‘Brexit day’ on 29 March 2019 and is expected to last until 2020. During this time, Britain will continue as a member of the single market and customs union.1

Some commentators predicted that the vote to leave the EU on 23 June 2016 would trigger a market meltdown. But so far – despite periods of volatility – the market has proved resilient. The FTSE 100 index of Britain’s biggest companies reached record highs in May this year.

Past performance shouldn’t be relied on as a guide to the future – it’s impossible for anyone to predict where the markets will move next.

We consider how investors have fared since the UK’s vote to leave the EU, and how they might protect their portfolios from ongoing political and economic uncertainty.

The UK stock market and economy

While UK markets have held up since the referendum vote, the economic picture is looking less positive.

The latest data from the Office for National Statistics shows the UK gross domestic product (GDP) rose by just 0.2% in the three months to May 2018.2

The Bank of England said it expects the UK economy to grow by 1.4% this year, which is considerably lower than the 1.8% it had previously predicted.3

The disconnect between markets and economic growth is due to the fact that stock market performance is overwhelmingly driven by factors outside the UK.

For example, a growing global economy has helped spur the FTSE 100 index on to reach record highs.

The index has also been boosted by the rising cost of oil, which recently reached $80 a barrel, prompting a rise in the share price of some of the index’s biggest oil companies.

William Hobbs, Barclays’ Head of Investment Strategy, says, “The current buoyancy of oil prices will be helpful to an index that leans relatively heavily towards the commodities sector.

"It’s important to remember that around 75 to 80% of the variation in UK stock prices can be explained by foreign rather than domestic influences.

"This figure rises to over 90% if one looks at the variations over a five-year time period. So we can more or less tune out the current vagaries of the UK economic backdrop as a useful source of information on the FTSE’s performance.”

The weak pound since the referendum vote has also proved positive for many of the exporting, large, multinational companies listed on the FTSE 100. They generate most their sales overseas and benefit from the weaker exchange rate and strengthening global economic growth.

The weakness of the pound benefits them when their earnings are converted back into sterling. But the downside of sterling falling is that it reduces British companies' international buying power, pushing up the cost of imports and potentially sending inflation higher.

In contrast, when sterling rallies, this pushes down share prices. The reason the share prices often fall when the pound strengthens is that foreign profits are reduced when they’re converted back into sterling.

Protecting your investment portfolio

No one can predict exactly what direction GDP and the stock market will go next, in the lead up to the UK’s formal exit from the EU. But it makes sense for investors to be prepared for every eventuality by making sure their portfolios are properly diversified and investing regularly to smooth out volatility.

Despite the current strength of the FTSE 100, there are certain factors that might relegate it down the pecking order of favourite equity indices.

William Hobbs says, “The most important of these is that in a world where the cyclical prospects remain bright, outside of its commodities exposure, the FTSE leaves you with relatively less skin in the cyclical game than other stock markets.

"In such a context, the FTSE should be relatively weighed down by its heavy exposure to the more defensive sectors such as consumer staples, utilities and pharmaceuticals.

"Meanwhile, its banking sector lacks the recovery appeal of its more persistently troubled continental European peer group.”

Although the index still holds appeal as a diversifier, we see more short-term potential in the stock markets of US, continental Europe and emerging Asia.

Make sure your portfolio has a global reach – a spread of investments across a wide variety of geographical regions might help reduce the risk that your portfolio value will be damaged by a fall in one particular area.

The hope is that some of your investments will rise to offset falls in other areas, although diversifying your holdings can’t entirely wipe out all the risk that comes with.

Remember – the value of investments can fall as well as rise and you could get back less than you invest.

Barclays is not providing you with financial, legal or tax advice, so nothing contained in this article should be construed as constituting legal, financial or tax advice. Tax rules and legislation can change and the benefits and drawbacks of a particular tax treatment will vary with individual circumstances. We recommend that you take professional advice where required. You have sole responsibility for the management of your tax, financial and legal affairs, including making any applicable filings and payments, and complying with any applicable laws and regulations.

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William Hobbs, Barclays' Head of Investment Strategy for the UK and Europe, reviews the markets during the first quarter of 2018, covering the threat of trade tensions, swings in stock markets and the return of inflation.

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The value of investments can fall as well as rise. You might not get back what you invest.