If you have been using Britain’s stock market to gauge on how uncertainty surrounding the Brexit vote is truly affecting the UK economy — you’re looking in the wrong place.
The FTSE 100 is up around 5% since June 23, reaching 6,610 points on Monday and some people think that this shows that the Brexit vote is having a minimal impact on the economy.
Stock market investors’ response to the UK’s decision to leave the European Union, and the ensuing political chaos, has given fuel to Brexiteers claiming that the economy won’t hit a speed bump.
The FTSE 100’s rise has even given Nobel laureate Paul Krugman reason to tweet his optimism about the UK economy:
But the FTSE 100 is masking the domestic risks, rather than reflecting economic opportunities.
Sterling’s collapse, from around $1.50 to below $1.30, in the wake of the vote is good news for companies that rely on exports. It makes their prices more competitive and boosts revenue in the short term. Around 70% of the revenue of the companies that make up the FTSE 100 is derived from abroad, so the index is mirroring that effect.
The FTSE 100 index is also peppered with mining companies. Gold has been on huge bull run since the vote, with investors using it as a hedge against economic uncertainty, which helps to hike revenues at those companies that rely on high precious metals prices.
Here is what Goldman Sachs analysts say:
“Even though the FTSE 100 and SXXP have been resilient since the EU referendum, relative moves underneath the index level have been large.”
“UK domestic stocks and the FTSE 250 have underperformed and could further decline as consensus earnings have not fallen very far. GS analysts have forecasts on average 7% below consensus for the UK domestic stocks of our basket GSSTUKDE.”
Here is the first chart from Goldman Sachs. It shows that, while the FTSE 100 has done well compared to European peers, the FTSE 250, which has a wider spread of companies that depend on the health of the domestic economy, has cratered:
You might have done well to invest in companies with an international outlook before and after the Brexit vote.
But betting on the UK domestic economy this year has been one of the worst things in the world you could have done with your money:
When it comes to domestic exposure, it is usually banks and housebuilders that get hit hardest.
And here is the chart confirming that: