Brexit  

Brexit one year on: six surprises for investors

Brexit one year on: six surprises for investors

Official Brexit negotiations have started, a year since Britain went to the polls on 23 June to vote to leave the European Union. We look back at some of the scary scenarios market commentators predicted to see if they were right.

UK equities

Panic was expected in stock markets after the vote and, sure enough, there was an immediate sell-off.

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UK shares plunged as investors reacted to the vote for an EU exit, and the spectre of recession that came with it. The FTSE 100 fell more than 8 per cent in the initial minutes of trading, with banks hit especially hard. A similar sharp drop was seen in the more domestically focused FTSE 250.

But the main market has since climbed 17 per cent and has set more than one new record high this year, partly as a function of the weakness in sterling.  

Bonds

UK government bonds were expected to be a clear barometer of market feeling on the UK. HM Treasury’s analysis ahead of the vote suggested a 40 basis point jump in the government’s 10-year borrowing rate, while investors predicted yields would fall given the political uncertainty and shortage of safe havens.

In fact, 10-year gilt yields fell to a record low of 0.93 per cent at the end of Monday 23 June.

Alix Stewart, fixed income fund manager at Schroders, said: "In bond markets, 10-year gilt yields dropped sharply after the vote; from nearly 1.4 per cent on the day to under 1 per cent in pretty short order.

"After the BoE decided to cut rates last August, yields fell as low as 0.52 per cent before recovering fully as the 'Trumpflation' trade took hold.”

The pound

A huge slump in the pound was one scary scenario which did come true. The pound bore the brunt of panic over Brexit, hitting a 31-year low against the euro. Since its peak in August 2015, the euro to sterling exchange rate is down 21 per cent.

Heartwood IM’s Graham Bishop 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.”

On the plus side, the pressured pound has helped lift the shares of the overseas earners and exporters on the FTSE 100.

Economic contraction

Fears of an outright recession have proven unfounded in the year since Brexit, but we are not out of the woods yet.

Ed Smith, asset allocation strategist at Rathbones, says he is now placing a higher probability on an adverse outcome for the economy than he did before the referendum, up from 10 per cent to 30 per cent, because of the threat of a ‘hard Brexit’.

Azad Zangana, senior European economist at Schroders, says most economists were predicting a downturn immediately after the vote.  

“The economy accelerated immediately after the referendum. Households ignored the depreciation in the pound and the growth in consumption accelerated. This took the UK economy to the top of the G7 growth table by the end of 2016.