Ten years of Brexit: How have UK equities and the pound performed?
Ten years of Brexit: How have UK equities and the pound performed?
Ten years of Brexit – As the UK marks a decade since the June 2016 referendum that initiated its departure from the European Union, the financial landscape has undergone significant shifts. While the FTSE 100 index has climbed to unprecedented heights, the broader implications of Brexit remain evident in the market’s long-term trajectory. A comprehensive study by Morningstar, titled “The Brexit Decade,” highlights the lasting effects of the vote, demonstrating how the UK’s financial performance diverged from global peers over the past ten years.
Equity Market Trends
Despite the FTSE 100’s gains, the UK’s stock market has struggled to keep pace with its international counterparts. Since the referendum, the index has recorded a 62% increase, translating to a compounded annual growth rate of nearly 5% over the decade. However, this performance has been outstripped by the S&P 500, which surged by 253% in the same period, delivering a 13.4% annual return. The disparity underscores a persistent underperformance of UK equities against U.S. markets, with the gap widening further when compared to European benchmarks.
Within the continent, the German DAX and Euro STOXX 50 indices have shown robust growth, returning 151% and 109% respectively. This suggests that Brexit has not only affected the UK but also created a broader competitive disadvantage for London’s financial sector. The study notes that the UK’s market has been disproportionately impacted, with its performance lagging behind other European economies that retained their EU membership.
Underlying Structural Challenges
According to Morningstar, Brexit served as a catalyst rather than the sole cause of the UK’s market struggles. The UK equity market was already facing structural challenges prior to the referendum, including a decline in domestic pension fund investments, a shift in capital toward U.S. growth stocks, and an imbalanced sector composition. The market’s reliance on energy, banking, and mining sectors contrasted sharply with the dominance of technology companies during the 2010s, which fueled global equity growth.
These pre-existing issues were exacerbated by Brexit, which increased perceived risks for UK assets and dampened investor confidence. The cumulative net outflows from UK equity funds over the past decade have reached approximately $160 billion, marking six consecutive years of withdrawals. This trend reflects a structural loss of confidence rather than a temporary market correction, as investors have systematically moved capital away from the UK.
Investor Behavior and Market Reallocation
Investor behavior has been a critical factor in the UK’s financial transformation. The study reveals that UK equity allocations have been increasingly replaced by U.S. assets, with passive investment strategies gaining traction as active management strategies faltered. Over the last two decades, the UK’s share of global benchmarks like the MSCI ACWI has nearly halved, dropping from nearly 10% to around 4% today.
Within the aggressive sterling-allocation fund category, average UK equity weights have fallen from 40% to 18%, while capital has been redirected toward U.S. equities. This shift has been particularly pronounced in the asset management sector, where over 380 UK equity strategies have closed since 2016, compared to just over 200 new launches. Meanwhile, passive funds have captured a growing portion of assets, rising from 22% to 46% in the same timeframe.
Active large-cap managers, such as Columbia Threadneedle, Jupiter, Liontrust, Aviva, and Schroders, have experienced the most substantial outflows, while firms like Vanguard, iShares, and Phoenix Group have seen inflows. The study acknowledges that isolating Brexit’s impact is complex, but there is broad consensus that it worsened the UK’s financial outcomes significantly. Additional factors like the pandemic, inflationary pressures, geopolitical tensions, and declining foreign direct investment have further compounded the challenges.
Currency Market Impacts
The pound’s performance since the Brexit vote mirrors the equity market’s struggles. Against the U.S. dollar and euro, the currency has depreciated by about 10% and 12% respectively, reflecting a loss of confidence in the UK’s economic stability. On the eve of the referendum, one pound equaled €1.31, but nearly a decade later, it buys only €1.15 — a 12% erosion in purchasing power against the single currency the UK chose to exit.
The depreciation has been even more pronounced against central and eastern European currencies. Sterling has lost over 20% of its value against the Czech koruna and 13% against the Polish zloty. These declines highlight how the UK’s economic position has weakened relative to emerging markets that have benefited from EU integration and sustained foreign investment. Notably, the pound has maintained a slight edge against the Hungarian forint, with a 1.8% gain over the past decade, indicating a nuanced shift in currency dynamics.
Analysts argue that the UK’s underperformance is not solely due to Brexit but also a result of long-term structural imbalances. The decline in the pound has further strained the economy, particularly in sectors reliant on international trade. Weak exports, coupled with domestic policy missteps, have created a challenging environment for UK financial markets. The gilt market crisis in autumn 2022, for instance, amplified concerns about the country’s fiscal stability and deepened the currency’s decline.
Despite these challenges, UK equities have shown signs of recovery in recent years. Since 2022, the market has outperformed both U.S. and global indices, driven by a strong value rotation and resilient dividend payouts. However, valuations remain below their historical averages, with the UK trading at a 30% to 35% discount to the U.S. in terms of price-to-earnings ratios. Small and mid-cap stocks are particularly undervalued, reflecting lingering investor skepticism about the country’s future prospects.
While the decade of Brexit has left its mark, the path forward remains uncertain. The UK’s financial markets continue to grapple with the legacy of the referendum, even as they adapt to new economic realities. The question now is whether the UK can reclaim its position in the global financial landscape or if Brexit’s impact will persist for years to come. As the country navigates this complex terrain, the interplay between equity performance and currency movements will remain a key indicator of its economic resilience.
“Brexit was a catalyst rather than the root cause of the UK market’s underperformance,” notes Morningstar. “The UK equity market entered the 2016 referendum with pre-existing structural headwinds that were amplified by the decision to leave the EU.”
The study’s findings suggest that the UK’s financial markets have been reshaped by a combination of internal and external factors. While the pound’s depreciation and equity underperformance have been notable, the resilience of certain sectors and the rebound in recent years offer a glimmer of hope. Yet, the long-term implications of Brexit continue to cast a shadow over the UK’s economic trajectory, with its global footprint shrinking and investor sentiment shifting toward more stable markets.
