With Brexit negotiations now underway, has it been as bad as predicted?

The currency

Sterling has been hardest hit in the wake of the Brexit vote.  Laith Khalaf, senior analyst, Hargreaves Lansdown says: ‘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.”

One pound bought $1.4877 on 20 June last year. It now buys just $1.2629. A similar pattern is seen with the Euro – €1.3072 to €1.1343 (source: Hargreaves Lansdown, Bloomberg). Graham Bishop, investment director at Heartwood Investment Management said: “Sterling’s devaluation in response to the shock UK referendum result has been the most significant market event in recent years. It has yet to materially recover from its post-referendum low and now remains vulnerable to even more political and economic uncertainty.”

Interest rates

The emergency measures brought in by the Bank of England in the wake of the vote to leave the European Union have seen savings rates halve. The average cash Isa now pays just 0.41%, compared to 0.87% before the Brexit vote. The chance of a UK interest rate rise by the end of 2018 has fallen from 86.1% to 20.4%. With inflation now running at 2.9%, cash savings rates are even lower in real terms.

The stock market

Overall, the UK stock market has performed well since the EU referendum. The FTSE All Share is up 21.8% since the vote. However, it has lagged other global markets, where returns for UK investors have been boosted by the weak currency.

Khalaf says that the movement in the currency has been a significant influence: “The big international blue chips of the FTSE 100 outperformed the more domestic midcaps. However, the FTSE Small Cap index has surprisingly returned more than the FTSE 100. On the face of it this may seem like a sign of the strength of the domestic economy, however the headline small cap index is heavily populated with investment trusts, many of which invest in overseas equities. Stripping out the performance of these trusts leaves the small cap index lagging slightly behind the FTSE 100 since Brexit.”

Dixons Carphone, Travis Perkins and Berkeley Group have all left the benchmark FTSE 100 index, following concerns over consumer demand stemming from Brexit. The strong performance of the mega caps has led to further concentration of the benchmark index in the very biggest stocks. The biggest 10 stocks accounted for 42.7% of the index on 23^rdJune last year; they now account for 46.1%.

Paul Mumford, manager of the Cavendish Opportunities fund, sees opportunities ahead, particularly in some of the ‘forgotten’ domestic names: “Inflation may continue creeping up, and over the longer term I believe the pound will recover, but for now there is the opportunity to take advantage of some depressed share prices – especially when it comes to stocks linked to the domestic economy such as retailers and construction firms, where we currently see high yields and selling at low multiples.”

UK government bonds

UK gilts have continued to perform well for investors. However, the yield on a 10 year government bond is now just 1%. This means investors are tying up their money for 10 years to receive a return of 1% per year, 1.9% below current inflation levels. This looks like a poor return, unless investors are particularly gloomy about the outlook.

Housing market

There has been a weakening in the housing market in recent months. The most recent report from Nationwide showed house prices falling for the third month in a row in May. Khalaf says: “The residential property market has been somewhat disappointing against the backdrop of more robust growth in recent years, though younger savers working hard to keep pace with house prices might breathe a sigh of relief that the treadmill has slowed slightly.”

Conclusion

It is only in currency markets that the more dire Brexit predictions have come to fruition, though it has also been tough for savers. That said, Brexit hasn’t happened yet…