Britain voted to leave the European Union (EU) in the famed Brexit vote on June 23, 2016. That means it’s been just over five years since voters decided to end 47 years of U.K. membership in the EU. This was a huge decision, with far-reaching economic and investment implications that are still being processed.1

Our research looks at trends not only in the U.S., but also across the global economy. We live in an increasingly globalized world – more than 50% of all reported foreign taxable income (for all companies, globally) is earned in Europe and Asia. In 2019, S&P 500 companies derived almost 30% of their revenues from outside the U.S. Investors may not realize it, but by owning large cap U.S. stocks, you are actually gaining international exposure.2

Today and going forward, understanding where multinationals derive revenue – and understanding the macroeconomic pictures in those regions and countries – are key components of thorough earnings analysis.

That’s what makes the U.K., which was the 6th largest economy in the world in 2020, so important. It also makes it worth analyzing the Brexit decision closely, to understand how the U.K. has performed since the decision – and what the future may hold.

So far, it has not been so good. Here are a few key data points worth noting:

• In the five years from June 23, 2016, to June 23, 2021, the MSCI All-Country World Index rose +80.65%, but the MSCI UK Index is only up 8.13% (price returns). The underperformance here is quite significant;
• Britain’s international trade has declined 14% since 2018, while total world trade declined a lesser 8% over the same period;
• Of 10 major global currencies tracked since the Brexit referendum on June 23, 2016, the pound sterling (GBP) has weakened the most;
• Business investment in Britain stalled in the years following the vote, and took a big hit during the pandemic;
• London has been slowly losing its status as the financial capital of Europe, with banks continuing to shift employees to other European cities;
• And, most recently, Britain has been facing labor shortages similar to what we are seeing here in the U.S., without the ability of EU workers to enter the country and fill jobs.

Brexit has not been an unmitigated disaster for the U.K., but it has certainly not been a triumph, either. The upshot is that the U.K. may implement some pro-growth policies going forward, which could reopen an investment thesis for British stocks.

The government is currently planning a “super deduction” tax break, which will allow businesses to deduct 130% of new equipment and plant spending. If a business buys a $100,000 machine in 2021, it can deduct $130,000 from revenue when filing taxes in 2022. This tax break could spur new investment.

Financial services make up 7% of Britain’s economy, and 40% of its financial services exports go to the EU. But Brexit has muddied London’s standing as the financial hub of Europe, with cities like Amsterdam, Frankfurt, and Paris vying to take its place. On the working first day of 2021, trading in European shares showed a marked shift from venues in London to venues on the European continent. Many expect the trend to continue.

Once again, the government is attempting a pro-business response, by overhauling rulings on listings and loosening regulations. Part of this effort involves allowing SPACs into the markets and setting up a fast-track visa process for fintech workers who want to move to Britain. Fintech is another area where regulators are being asked to step back to let start-ups experiment.

Bottom Line for Investors

The five years since Brexit have been largely rough going for the U.K. economy and equity markets. Stock market returns have been muted, growth has been uninspiring, trade has fallen, and business investment has stalled. There have not been many reasons to be excited about investing there.

The picture could look different going forward, however, as the government seeks to goose the economy with lower taxes, less regulation, and other incentives like fast-tracked visas for tech workers. All developed economies are likely to see a strong bounce back in the months and quarters following the worst of the pandemic. The question for the U.K. and global investors, however, is whether Britain can return to its pre-Brexit might.

Disclosure

1 Bloomberg. June 23, 2021. https://www.bloomberg.com/opinion/articles/2021-06-23/brexit-five-years-after-referendum-shows-no-gain-just-pain

2 S&P Market Intelligence, June 18, 2020. https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/s-p-500-companies-non-us-revenue-share-hits-10-year-low-8211-goldman-sachs-59094991

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