Reuters | Nov 20, 2020 16:25
By Ritvik Carvalho and Tommy Wilkes
LONDON (Reuters) - Britain and the European Union are trying to reach a trade deal to regulate their relationship after Dec. 31, an agreement that should lift some of the uncertainty clouding the UK outlook 4-1/2 years after Britons voted to leave the trading bloc.
The impact on UK financial markets of that vote and the years of negotiations and missed deadlines since has been profound -- the British currency is 20% below its long-term fair value, stock prices have underperformed almost every other major market and businesses have held back on new investment.
On Wednesday, British finance minister Rishi Sunak will announce the heaviest public borrowing since World War Two when he spells out his spending plans.
Below are five graphics setting out the impact of Brexit on British assets since 2016.
1) STERLING'S WILD RIDE
Sterling has been on a rollercoaster since the June 2016 Brexit vote -- some analysts say the volatility resembles that of an emerging market currency.
From trading above $1.50 before the referendum, the pound has had several brief forays below $1.20 - its lowest level since the 1980s. It is now trading around $1.33 - indicating a Brexit discount remains.
Graphic: Brexit: a rollercoaster ride for the pound - https://fingfx.thomsonreuters.com/gfx/mkt/qzjpqoowrpx/Pasted%20image%201605849973368.png
2) STOCK LAGGARDS
British share prices have underperformed nearly all their major peers since 2016 as investors put their money to work elsewhere.
Despite a stonking central bank-fuelled rebound in global stocks this year, UK domestic-focused company shares remain just 12% higher than early 2016 levels. The FTSE 100 is up just 1.5% -- that's against a nearly 80% gain for the S&P 500 and a 50%-plus rise for world stocks.
Graphic: Brexit woes keep UK stocks global laggards - https://fingfx.thomsonreuters.com/gfx/mkt/qmyvmxxqzpr/brexit%20and%20uk%20stocks.PNG
3) WEAK INVESTMENT
New UK business investment has flatlined since the 2016 referendum, before falling sharply after the COVID-19 pandemic whacked confidence.
After steady growth in year-on-year business investment before 2016, companies have since cut back on new capital expenditure amid Brexit-related uncertainty.
Year-on-year growth in UK business investment notably fell in late 2018 as companies concerned about the consequences of a no-deal Brexit postponed or axed spending.
Graphic: UK business investment - https://fingfx.thomsonreuters.com/gfx/mkt/xklvybbnopg/Pasted%20image%201605854465573.png
4) BREXIT PREMIUM
British companies have had to pay more to borrow from lenders nervous about Brexit, reflected in bank-issued bonds.
For instance, the gap between the yield on Barclays (LON:BARC)'s September 2023 euro-denominated bond and a Deutsche Bank (DE:DBKGn) note maturing the same month was as high as 80 basis points in late 2018 when fears of a no-deal Brexit surged.
It is currently at 5.5 basis points after falling sharply since April, reflecting investor confidence that London and Brussels would agree a trade deal.
Graphic: UK corporate borrowing premium - https://fingfx.thomsonreuters.com/gfx/mkt/bdwpkllzmvm/Pasted%20image%201605855140873.png
5) WEAKER FINANCES
With a large current account deficit and a debt-to-GDP before the COVID-19 pandemic above 80%, Britain is reliant on international investors' confidence in the UK economy and its markets.
Britain's current account deficit, higher than many peers, has fallen sharply during the pandemic.
But the budget deficit is soaring as the government ups spending to rescue the economy and debt-to-GDP is approaching 100% -- leaving less headroom to spend should the economy need more support after the Brexit transition period ends on Dec. 31.
Graphic: Financial vulnerability - https://fingfx.thomsonreuters.com/gfx/mkt/dgkplaadrvb/Pasted%20image%201605850673376.png
Written By: Reuters
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
Get free real time quotes, charts and alerts on stocks, indices, currencies, commodities and bonds. Get free top of the line technical analysis/predictors.
More content, faster quotes and charts, and a smoother experience is available only on the App.