Posted by on June 23, 2017 11:20 pm
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Categories: Aftermath of the United Kingdom European Union membership referendum Bond brexit Capital Markets conservative party Currency Deutsche Bank Economic effects of Brexit Economy Equity Markets Euro European Union Euroscepticism in the United Kingdom FTSE 100 Gilt-edged securities Gilts Jim Reid Nikkei Pound sterling S&P 500

It is exactly one year since the UK held the historic referendum vote on EU membership. As Deutsche Bank’s Jim Reid notes, whether you think that has passed quickly or not probably depends on if you’re a Sterling FX trader, in which case it’s more than likely been a long year. With today being the anniversary we thought we would see how assets have performed over the past year since the vote…

First and foremost the standout is the currency has been pounded with a huge decline for Sterling versus both the Dollar (-15%) and Euro (-13%). That massive move in the currency has helped to prop up local currency returns however and we’ve seen the FTSE 100 surge an impressive +22% (clearly boosted by big UK exporters) while GBP credit has returned between +8% and +15% and Gilts have returned +7%.

Under the covers of the index – there are big winners and big losers (in local currency terms) also…

However it is the USD hedged returns which are of most interest and this is where we have seen UK assets really underperform.

Gilts have returned -9%, GBP credit -2% to -8% and the FTSE 100 a more benign +4%. Indeed the FTSE 100 has underperformed all other equity markets in our sample in USD terms. The Athex (+32%), Hang Seng (+26%), IBEX (+23%), DAX (+22%), European Banks (+21%) and Nikkei (+20%) are all up over 20% while the S&P 500 is also up an impressive +18%. Credit returns outside of GBP credit are more muted but still flat to +11% generally.

Where we have seen some weakness however is in rates. While bond markets initially rallied in the first week or two post the vote yields have for the most part edged higher ever since. Gilts still standout for their underperformance but Bunds (-3%), BTPs (-3%), Treasuries (0%) and Spanish Bonds (0%) haven’t rewarded investors as one might expect given the huge uncertainty that the result created. Indeed the same can also be said for Gold (-1%). If you exclude currencies, then 33 out of 43 assets in our sample have a positive total return in local currency terms and 26 out of 43 assets in USD terms have a positive total return.

So, as Deutsche’s Reid notes, it’s been an impressive rally for risk despite an outcome which has seen political Europe enter unknown territory. On that any hopes that the UK political situation would be resolved or at least stabilise essentially came to an end following the snap election earlier this month.

Since the referendum result we have seen Political Chaos:

  • A year of leadership contests within the two main political parties in Britain;
  • Court cases trying to prevent Brexit from happening;
  • Embarrassing leaks demonstrating Prime Minister Theresa May’s weak ability to negotiate with the EU.
  • Volatile markets, the decimation of the pound, and preparations for job relocations;
  • A disastrous general election that has put Britain in line for a Brexit deal that looks very similar to what we have now;
  • A  government in disarray;
  • And finally the possibility that Brexit could be reversed …

The possibility of another election in the future hasn’t necessarily gone away either while the Conservatives and DUP parties are still to come to an agreement. What that means for Brexit talks is also still a bit of an unknown which is why there is a fair bit of focus on the two-day EU summit which kicked off yesterday. This is the first summit since the election for Theresa May and also coincides with Brexit negotiations having kicked off on Monday. Yesterday May proposed a “fair and serious” offer to guarantee the rights of EU citizens living in Britain, telling leaders of the EU that no EU citizens living in Britain lawfully at the time in which Britain leaves the EU would be asked to leave.

And finally, the consumer has been pressured by soaring prices as inflation bites…

“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, said Laith Khalaf, senior analyst at Hargreaves Lansdown.

Finally, Khalaf sums up the year…

“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.”

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