Jonathan Marriott – Chief Investment Officer, LGT Vestra LLP
What impact has Brexit had so far?
There are some who claim that Brexit has had no impact on the UK economy and we can sail through an exit from the European Union without disruption. Others have predicted dire consequences. Both the Bank of England in its quarterly report and the Office of Budget Responsibility have reduced growth forecasts but stressed that the range of possible outcomes is wide and hard to predict. These are known unknowns for the future but what we can look at in some detail is what has happened in the nearly six months since the referendum vote.
Those that believe there is little cause to worry, refer to continued good economic figures and the rise in the stock market. What they tend to brush over is the fact that the Bank of England has intervened by cutting rates and buying bonds and that sterling has fallen substantially since the vote. Without these adjustments it is very unlikely that the economic data would be as healthy as it appears to be and we have yet to trigger Article 50, therefore the impact may yet be felt. A combination of rising oil prices and the sharp fall in sterling is having an impact on input costs for producers. Consequently, the PPI Input Price Measurement of Materials and Fuels was up 12.2% in the year to October. We anticipate this will partially feed through to retail prices which we are expecting to rise faster than wages in the New Year. This is a constraint on spending that has yet to be felt.
Over 70% of FTSE All Share company earnings are derived from overseas. So with the pound down it is unsurprising that the index is up in sterling terms. If we want to see a better measure of stock market reaction we need to look beyond the headline numbers. Most people tend to focus on the FTSE 100 or the All Share index to measure UK stock performance but FTSE also have an index which only takes companies with over 70% turnover in the UK. This FTSE Local UK index may be a better measure of the market’s view of the domestic economy. Today the FTSE All Share index is up nearly 13% including dividends from the start of the year. Over the same time frame the Local UK index is down 7%. The sector split is different with a higher proportion in financials in the domestic index. However, should we compare sectors like for like, we can see that the industrials sector, for example, in the All Share is up 13.4% and in the Local UK index the sector is down 11%.This shows the stark contrast between domestic companies and those that work more internationally.
We are seeing an impact and there will be more to come. The outcome from the Brexit negotiations may reverse many of these moves or they may continue. However to say there is no impact, like many things on both sides of the debate, is far from the truth.
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