The United Kingdom’s decision to leave the European Union (EU) had a seismic impact on the global financial markets, and the geopolitics that sustain them. But what if the so-called Brexit referendum had a different result, and Britons voted to remain in the Single Market? Would we be any better off today? This week Finance Monthly heard from Evdokia Pitsillidou of easyMarkets regarding the titled question.

By any measure, the British pound may have certainly had a better fate had Britons voted Remain. Sterling was trading around $1.48 US on the eve of the June 23rd referendum, and even reached $1.50 just after polling stations had closed. Hours later, sterling was down to $1.33, having lost 10% against the dollar and reaching its lowest level in 31 years.[1]

But the bloodbath was not over. By October, the pound had dropped below $1.22 after newly appointed Prime Minister Theresa May signaled she would pursue a “hard Brexit” from Brussels. It was during this period that the sterling found itself trading at 168-year lows against a basket of other currencies.[2]

Although the pound was on a long-tern downtrend prior to Brexit, it is inconceivable it would have depreciated so quickly had the Brexit vote gone in favour of the Europhiles. Had the UK opted to remain, the pound may be lower than it was on the eve of the referendum, but not 18% lower as it is today. Brexit was therefore not just a defeat for the Europhiles, but for the once mighty sterling.

Brexit had the opposite effect on British stocks. The sharp depreciation in the pound was a boon to the export-oriented FTSE 100 Index, which opened 2017 on the longest run of record highs since 1984.[3] By January 10, London’s benchmark index had established its longest winning streak on record, printing nine straight days of record gains.

British stocks have returned nearly 19% since the Brexit referendum and are up more than 28% year-over-year. Underpinning their growth is more than just a weaker local currency. Less than two months after the Brexit vote, the Bank of England (BOE) slashed interest rates for the first time in over seven years and expanded the size of its asset buys in an extraordinary effort to stave off recession. The Bank’s moves may have been almost unthinkable had the UK voted to remain.

Just a few years prior, experts had tipped the BOE to be the first major central bank to raise interest rates. While the Fed beat it to the punch, it highlights just how unlikely the Bank’s rate cut would have been had Brexit gone the other way.

For policymakers, the hefty dose of monetary easing was justified, given they had just made their biggest quarterly downgrade of growth forecasts on record.[4] Thankfully, the British economy has held relatively firm over the past seven months, but that may to change moving forward once the British government triggers Article 50 of the Lisbon Treaty, the formal mechanism for leaving the EU.

Brexit may have also unleashed a wave of pent-up populism across Europe that is threatening to leave Brussels behind. Following the UK vote, nationalist movements in France, Germany and Italy are awaiting their opportunity to break away from Brussels. With elections in France and Germany coming up, investors are bracing for a potentially volatile year in the market.

The outlook on the global market wasn’t good before Brexit, and it certainly isn’t any better in the wake of the landmark vote. Concerns about free trade, economic growth and financial market stability have been exacerbated by Brexit, and the negotiations for the separation have yet to even begin.

A High Court ruling last month stipulated that Brexit cannot happen without parliamentary assent, setting the stage for a bigger legal battle for the British government. Prime Minister May appealed the decision, but may be upheld by the Supreme Court later this month.[5] For the Brexiters, this may mean a contingency plan. For investors, this may mean greater uncertainty about when, and if, Article 50 will be implemented. And as we know, uncertainty is the bane of the financial markets.

Risk warning: Forward Rate Agreements, Options and CFDs (OTC Trading) are leveraged products that carry a substantial risk of loss up to your invested capital and may not be suitable for everyone. Please ensure that you understand fully the risks involved and do not invest money you cannot afford to lose. Our group of companies through its subsidiaries is licensed by the Cyprus Securities & Exchange Commission (Easy Forex Trading Ltd- CySEC, License Number 079/07), which has been passported in the European Union through the MiFID Directive and in Australia by ASIC (Easy Markets Pty Ltd -AFS license No. 246566).

[1] Katie Allen (June 24, 2016). “Pound slumps to 31-year low following Brexit vote.” The Guardian.

[2] Mehreen Khan (October 12, 2016). “Pound slumps to 168-year low.” Financial Times.

[3] Tara Cunningham (January 10, 2017). “FTSE 100 record longest run of closing highs since 1984 as Brexit fears hurt pound.” The Telegraph.

[4] Catherline Boyle (August 4, 2016). “Bank of England cuts key rate for the first time in over seven years to 0.25%.” CNBC.

[5] Reuters (January 11, 2017). “UK government expects to lose Brexit trigger case, making contingency plans – report.”

The FTSE 100 yesterday rose for an eleventh consecutive trading day, making this the joint longest winning streak the index has ever produced.

The index has risen for 11 trading days in a row on three other occasions, so if the rally continues today, it will be the longest winning run since the index started 33 years ago.

Laith Khalaf, Senior Analyst, Hargreaves Lansdown commented:

‘The stock market moves down as well as up, but you wouldn’t have guessed that if you’d been keeping your eye on the Footsie for the last few weeks.

The market rally has been driven by a falling pound and rising metals metal prices, and in its eleventh day received a boost from an unexpected source in the form of the supermarkets, after Morrison issued a positive Christmas trading statement.

While the FTSE 100 stands at a record level, valuations on the UK stock market are not at abnormally high levels once you factor in the earnings produced by UK companies. What’s more the headline index doesn’t account for dividends, which are a key element of returns from the UK stock market, and are particularly attractive when interest rates are so low.

As ever the short term could bring feast or famine, but either way investors should keep focussed on the long term, which is where the stock market really comes into its own.’

(Source: Hargreaves Lansdown)

Yesterday was a positive day for the stock market, with the FTSE 100 now trading close to a one year high, led by domestically-focussed stocks, and following on from second quarter UK GDP growth coming in ahead of expectations at 0.6%. Even the FTSE 250 is back in the game, and is now trading close to its pre-Brexit level.

Longer term total returns from the UK stock market are also looking pretty good right now, though clearly there has been some choppiness along the way, and no doubt there will be more to come.

Source: Lipper to 26^th July 2016

Laith Khalaf, Senior Analyst at Hargreaves Lansdown commented:

‘Today (27/07) there’s been positive news for stocks at both a micro and macro level. Domestically-focussed stocks started the day on the front foot, with Taylor Wimpey, Rightmove and ITV all posting robust results, and GlaxoSmithKline announcing £275 million of investment in the UK. The strong UK GDP figures added to the confident mood, as stock prices shrugged off the Brexit blues.

However, all today’s figures look back to a period predominantly before the referendum, and as such they give us little indication of what the vote actually means for the economy, or the companies exposed to it. They do at least tell us the economy has some momentum going into the implementation of Brexit, and may yet give the Bank of England pause for thought when they decide whether to cut interest rates next week.

Indeed much of today’s rise in GDP was down to the manufacturing sector, which recorded its strongest growth in six years. Ironically, the makers appear to be marching now George Osborne has left Number 11. Business and financial services grew, but at a slower rate than in the first quarter, whereas construction output went backwards. We can see uneasiness over these sectors reflected in the stock market, with UK banks and house builders still licking their wounds from the heavy share price falls sustained since the Brexit vote.

The UK’s mid cap index has staged an impressive recovery since the referendum, but there have still been casualties of the decision to leave the EU, with around a fifth of the names in the index showing double digit price declines since the result was announced.’

(Source: Hargreaves Lansdown)

Private investors are seeing this morning’s market falls as a buying opportunity. 80% of the trades placed through Hargreaves Lansdown’s share dealing service this morning were purchases. This compares to around 60% on an average day.

Senior Analyst at Hargreaves Lansdown, Laith Khalaf commented: ‘Private investors are clearly seeing today’s market fall as a buying opportunity, and are out in force bargain-hunting. The most popular stocks are also those which have seen their prices hit hardest this morning, namely the banks and house builders.

We know that private investors have been sitting on the sidelines until after the referendum, and early indications are there may be some buying activity now the market has dropped.’

The UK stock market fell sharply this morning, but has since staged a bit of a recovery, though it is still down around 4.5%. The FTSE 100 has been bailed out by a falling pound, but the FTSE 250 mid cap index has not been so lucky- it has fallen by over 8% by lunchtime, because it is more domestically focussed and has fewer overseas earnings. Just to give some context to the fall, the FTSE 100 is still currently trading at above 6,000, around 10% higher than the low of 5,537 it fell to in February of this year.

The FTSE 100 has fallen further in the past. On Black Monday, in 1987, it fell by 11%. On 10^th October 2008, it fell by 9%. On 11th September 2001, it fell by 6%.Nonetheless, today’s fall so far makes it one of the worst days the Footsie has witnessed.

Laith Khalaf says: ‘The Footsie has been bailed out by the Sterling collapse, because all its international revenues streams are now worth that much more in pounds and pence.

Financials and house builders are bearing the brunt of the pain, with Lloyds bank being one of the biggest fallers. It’s probably safe to say the public sale of the bank is now firmly in the long grass, and the return to full private ownership of both Lloyds and RBS has been knocked off course.

It’s also been a bad day to be a mid-cap company - the FTSE 250 is suffering to a much greater extent than the blue chip index. Mid-cap companies have sold off harder because they are perceived to be more risky, and tend to be more domestically-focused with fewer overseas earnings.’The 10 most popular shares bought by private investors this morning, ordered by the number of trades placed are:

Below are the top ten funds purchased, ordered alphabetically. Tracker funds have proved very popular today as investors have simply sought blanket market exposure. However the tried and trusted names of the industry are proving popular too.

(Source: Hargreaves Lansdown)

Royal Dutch Shell has announced a £47 billion (€65 billion) merger deal with BG Group, which would reportedly make the combined company worth 9% of the FTSE 100, if it goes through.

The deal, already touted to be the biggest of the year, could produce a company with a value of more than £200 billion (€276 billion).

Big cost savings would result from the merger with Shell and BG Group expected to save $2.5 billion (€2.3 billion) a year, following the deal.

The acquisition would also add 25% to Shell’s oil and gas reserves and a 20% boost to production capacity, with big gains in the Australian liquefied natural gas market and the offshore oil fields of Brazil.

For shareholders and fund managers, the deal could add an extra layer of complexity to investment structure. UK funds may have difficulty accommodating the size of the new enlarged Shell group, because of rules which limit a fund’s exposure to any one company.

“The new merged entity would be by far the biggest company in the UK stock market, and its size would present difficulties for some funds which invest in UK shares. In particular closet trackers and pension funds could eventually find themselves outside of their comfort zone in terms of their active position, unless they rejig the rest of their portfolio to look more like the index to compensate, or abandon their index-hugging philosophy,” said Laith Khalaf, Senior Analyst, Hargreaves Lansdown.

The new combined group after merger would make up around 9% of the FTSE 100, based on its current valuation, and around 7.5% of the FTSE All Share. This may in due course present a challenge for some pension funds and closet trackers, which manage their portfolios largely in line with the benchmark index, pointed out Khalaf.

“This is because regulations prohibit active funds from holding more than 10% of their portfolio in one company. While this is not a problem at current valuations, should the combined group breach 10% of the UK stock market, for instance on the back of an oil price recovery, these funds may find themselves having to sell Shell stock to comply with this rule,” he explained.

London’s FTSE 100 broke through the 7,000 level for the first time in its history on March 20, 2015.

A small increase in the price of oil, signs of a solution to the Greek debt crisis and investor hopes that interest rates in the UK and US will remain low, helped propel the market on Friday.

The London listing finished the day on 7,022.51, with the index reaching 7,024.21 during the afternoon.

The FTSE 100 was launched in 1984. In 1998 it surpassed its 6,000 level, but it has taken another 17 years to reach the next milestone. In February, it passed a record high of 6,950, set at the time of the dotcom boom in 1999 tbimauritius.com.

Yesterday the FTSE 100 recorded its highest closing price ever, finishing at 6,949.63, higher than its previous best of 6,930.2, recorded on December 30, 1999, when the dot come boom was at its height.

In the same day, the FTSE also broke its previous highest intraday price, also achieved on that same day, of 6,950, with 6,958.89 reported yesterday.

However, while the FTSE may be reporting record figures, analysts warn that now might not be the best time to sell.

“It’s a red letter day for pension funds and stock market investors as the FTSE finally returns to the level it reached in December 1999. At the time the dot com party was in full swing, interest rates were at 5.5% and the average house cost just £75,000 (€102,000),” said Laith Khalaf, Senior Analyst, Hargreaves Lansdown.

“Fast forward to today via the tech crash and the financial crisis, and the UK stock market has been propelled through its previous high by the global economic recovery and the vast money printing programmes of central banks.

“But that doesn’t automatically make it a good time to sell. The current level of the FTSE is underpinned by company profits to a much greater extent than it was in 1999. The economic backdrop is also encouraging for UK companies, with low interest rates, low inflation, and growth forecasts rising,” he added.

However, according to Khalaf, risks still lurk in the background as the market waits to see how the Eurozone agreement with Greece pans out, while the outcome of the UK’s General Election is bound to have market implications.