Brexit

Learn which markets might be affected by Britain leaving the EU

Ever since the vote to leave the EU back in June, there’s been a lot of talk about the sort of Brexit the UK would undergo.

It’s becoming increasingly likely that a so-called ‘hard Brexit’ is on the cards. After all, by sticking to her guns on a stringent immigration clampdown, Theresa May will struggle to convince her European peers to provide single market access.

But a hard Brexit might not be the toxic event central bankers initially forewarned. In January, Bank of England governor Mark Carney recognised that the risks to financial stability will be felt by EU countries more keenly than by Britain itself. This could prove crucial for companies operating in the UK.

There may be time before Article 50 is triggered, but the atmosphere on both sides of the negotiating table seems unlikely to transform. Even a best case scenario, then, is likely to spark volatility and a great deal of uncertainty in the markets. 

Forex

Sterling fell sharply in the wake of the Brexit vote, and by the beginning of November it had sunk lower still. While we’ve seen moments of recovery over the last couple of months, we’ve also now seen how quickly this will evaporate: the pound has once again dropped away as the prospect of a hard Brexit builds.

The UK Treasury and the Bank of England have tried to reassure investors about the underlying strength of the UK economy, but the BoE was still forced to cut interest rates in August. Any further cuts, or more drastic action like QE, will have their own consequences for Britain’s currency.

Whether sterling recovers is dependent on how Britain’s economy is shown to be faring as Brexit takes its course, and how the Bank of England reacts. In the meantime, British exporters will welcome any weakness in the pound. For consumers, it may be another story, with further drops pushing up the price of imports, fuel and foreign travel.

Commodities

Gold once again became a safe haven after Britain voted Brexit, with the metal climbing above $1300 two weeks after the vote. However, the good times were short-lived. At the beginning of October, it was back down to pre-vote levels, and by the end of December, gold had fall to its lowest level over ten months, after the Fed announced a rate increase.

As Brexit comes into clearer focus, any disastrous news for the UK economy or EU stability might well offer a boost to gold. But traders will likely be paying more attention to the impact of these Fed policy decisions – and Trumponomics – than what’s going on in our neck of the woods.

 

Shares

Stocks across the globe fell in the wake of the vote, but European and UK companies were particularly badly hit.

The mid-cap FTSE 250, with more companies reliant on the domestic UK economy for their revenues, underperformed the far more international  FTSE 100. Likewise, the stocks that did best amid the widespread selloff were those with more international exposure, including pharmaceutical and tobacco companies.

A month after the vote, though, and both indices were back at early-June levels, and the FTSE 100 even managed to hit a new high in October. This was primarily due to continued depreciation in the value of the pound, but expect many other factors to come into play as Brexit draws closer.

Stock market winners

Gold and silver miners have surged, as the price of precious metals has risen once again. Randgold Resources and Fresnillo are popular, with the latter clocking up fresh 52-week highs.

Also popular at present are the high-yielding stocks, such as utilities, pharmaceuticals and tobacco companies. The pharma and tobacco companies also happen to make a good chunk of the revenues outside the UK and EU.

Solid revenues and good geographical diversification mean the UK’s own internal turmoil will have a limited impact in this case, and with revenues in sterling the falling pound may actually prove to be a benefit. Rolls-Royce Holdings, which has had a tricky couple of years, is back in favour for the time being for the same reasons.

Stock market losers

RBSBarclays and  Lloyds all saw their share prices hit hard after 23 June, as the prospect of lower UK interest rates threatened the net interest margins of major financial firms. As Brexit draws into view, expect more volatility in the banking sector.

It is still far from certain whether the UK’s housebuilding sector will end up a winner or loser in the long term. With uncertainty over jobs and wages leading house-buyers to put their plans on hold, however, most investors clearly decided that it was safer simply to abandon ship immediately after the vote.

This has proved problematic for  Foxtons the estate agent, which issued a profit warning shortly after the referendum. And it wasn’t alone: two major travel companies, IAG and  easyJet, did the same.

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