One year on from the Brexit vote and the UK stock market has reached record highs. The FTSE 100 has soared up to about 7,500, undeterred by an inconclusive election, waning consumer and business confidence, and a ticking leave clock. One fact you might have missed amid the furore: UK investors in European equities have done even better.
Over the past 12 months, just nine UK equity funds have made it into the top 100 in the IA UK and European equity sectors in terms of percentage returns. IA Europe Ex UK has returned just shy of 35 per cent; IA UK All Companies, just under 20 per cent.* The falling pound has helped European returns, but their percentage performance has been strong in euro terms too.
What is important now, though, is not so much the historic record, but who has the brighter outlook. For this, we must examine what is driving each market’s returns.
As we know, the pound has borne the brunt of Britain’s decision to quit the union – but at least we have had that mechanism. Weaker sterling has helped our largest companies, which earn much of their revenue overseas, to maintain share price and dividend growth.
If a lower pound is now fully priced in to our equities, where does the market turn for its next boost? Until a trade deal is reached, multinational conglomerates are holding off expansion on British shores. Banks such as HSBC and UBS are already moving jobs to the continent and car manufacturers are putting pressure on government time lines.
Lower down the cap scale, domestically focused businesses also face headwinds. Even without the benefit of a currency lift, small and mid caps have so far offered surprises to the upside. Despite the overall underperformance of UK equity funds versus European in the past year, two UK smaller companies funds made it into the top 10.
A more relevant question is whether our economy has gusto going forward. Falling consumer confidence and slowing wage growth suggest consumer spending might soon start to lag. An uncertain political and economic climate will do no favours to cyclical industries such as retailers and house builders and many consumer discretionary stocks.
Across the channel, the story is different. It has been a long time coming, but we can finally say Europe’s metrics are heading in the right direction. Inflation has been in positive territory across the eurozone (no mean feat given the extent of deflation in the wake of the sovereign debt crisis), employment stats are improving and rising GDP growth is forecast. At the latest European Central Bank meeting, economist Mario Draghi went so far as to hint that the nine-year rate-cutting cycle might be over.
In the March reporting season, a slew of companies posted earnings upgrades after several years of flat corporate profits at best.
In politics, anti-EU candidates were firmly rejected in French and Dutch elections. This has strengthened the EU’s mandate for unity at a time when the UK wants to leave. Keen to emphasise the benefits of membership – particularly to countries such as Germany and Italy whose elections are yet to come – Emmanuel Macron, Angela Merkel and their fellow European leaders are unlikely to make easy concessions on Britain’s access to the single market.