Brexit’s Economic Impact

Brexit’s Economic Impact

Studies suggest that Brexit has had a significant effect on the UK economy. Research from the University of Bonn show that households lowered spending following Brexit. This in turn caused national output to drop by 2%. However the “Brexit Effect” is as much about uncertainty, as it is about the actual damage of leaving the EU.

This sense of uncertainty is having a similar effect on the UK stock markets. Researchers at Centre for Economic Policy Research looked at key dates in the Brexit timeline, including the day following the referendum and Theresa May’s speech to the Conservative party in October of last year.

Globally focused stocks get a boost

The immediate impact of the referendum announcement had mixed results on the market. The falling pound, helped exporters, who saw higher than normal returns. Companies with greater exposure to the domestic market saw share prices fall. Overall, the picture was of investors pricing in bleaker days and a weaker pound for the UK.

This trend has continued over the next twenty four months. FTSE 100 firms with major overseas operations performed much better than their counterparts focused on the domestic market. A report in the Financial Times, showed that global companies in the Bat Brexit Low 50 index have increased by 33% since the referendum. Those companies in the Bats Brexit high 50, focused on the UK market, have seen share prices rise by only 2% over the same period.

Again, this ties back to the falling pound. Companies who make most of their money abroad, have seen their profits and dividends rise. Domestic focused companies have experienced a hit, as UK consumers feel their wallets pinched by higher inflation.

Weaker stocks hit hardest

Uncertainty tends to hit weaker stocks harder. Nervous investors who may have been willing to overlook companies with high debt levels and weak cash flow, take a more cautious stance when faced with bad Brexit news. This isn’t without good reason. If the UK is about to experience a slowdown in economic growth then weaker companies may not survive. Investors move towards the safer shores of companies which are viewed as being more resilient.

UK domestic stocks most volatile

Overall UK companies which are reliant on the domestic economy earnings have been the most responsive to Brexit news. Every time a deal appears to be on the horizon their share prices rise – and inevitably fall when hopes are dashed. Many believe that the stock prices for domestic oriented companies is now significantly underpriced. With cheap valuations, the announcement of a successful deal could jump if it seems likely that a deal will finally pass.

Beyond Europe the impact of Brexit is more muted. The UK may be the world’s 5th largest economy but Brexit is unlikely to have a noticeable impact on the global economy. For non-UK traders the bigger story is one of volatility. As Meir Barak, founder of TradeNet day trading academy, remarks

“My students and I trade British stocks very seldom, as we only trade New York listed stocks. Many UK stocks are indeed traded in New York, but tend to have large gaps as they are dually listed. For us, Tradenet.com day traders, the biggest impact from Brexit impasse for us so far is the volatility it adds intraday, as news from London keep rolling in during New York trading hours.”

Drama out of Downing Street doesn’t look like it’s going to end any time soon, so European investors can expect to see continued volatility in the weeks and months ahead. Non UK based traders will notice the ripples of Brexit news volatility, but bigger stories, such as China economic slowdown and incipient trade wars, are likely to overshadow.

You can watch Barak day trade, give tips and explains strategies on his youtube trading channel