LONDON (Reuters) – Britain and the European Union are trying to strike a trade deal to regulate their relationship after December 31, a deal that is expected to remove some of the uncertainty that is clouding the UK’s outlook 4- 1/2 years after the British vote in favor of leaving the trade bloc.
The impact on UK financial markets of this vote and the years of trading and missed deadlines since has been profound – the UK currency is 20% below its long-term fair value, stock prices have underperformed almost all other major markets return on a new investment.
UK Finance Minister Rishi Sunak will announce the heaviest government borrowing since World War II on Wednesday when he sets out his spending plans.
Below are five charts showing the impact of Brexit on UK assets since 2016.
1) THE WILD WALK OF STERLING
The pound sterling has been on a roller coaster since the June 2016 Brexit vote – some analysts believe the volatility resembles that of an emerging market currency.
After trading above $ 1.50 before the referendum, the pound has seen several brief forays below $ 1.20 – its lowest level since the 1980s. It is now trading around $ 1.33, indicating that a Brexit discount remains.
Graphic: Brexit: a roller coaster ride for the pound –
2) STOCK LAGGARDS
UK stock prices have underperformed almost all of their major peers since 2016, with investors investing their money elsewhere.
Despite a sharp rebound in global equities fueled by the central bank this year, stocks of UK domestically focused companies remain just 12% above levels at the start of 2016. The FTSE 100 rose only 1.5 %, compared to a gain of almost 80% for the S&P 500 and a rise of 50% and more for global equities.
Chart: Brexit issues keep UK stocks lagging globally –
3) LOW INVESTMENT
New investment by UK businesses has stalled since the 2016 referendum, before dropping sharply after the COVID-19 pandemic shook confidence.
Following steady year-over-year growth in business investment before 2016, companies have since cut back on new capital spending amid Brexit uncertainty.
Year-over-year growth in business investment in the UK declined significantly at the end of 2018 as businesses concerned about the consequences of a no-deal Brexit postponed or cut spending.
Chart: Business investment in the UK –
4) BREXIT PREMIUM
UK businesses have had to pay more to borrow from Brexit-worried lenders, which is reflected in bonds issued by banks.
For example, the spread between the yield on the Barclays euro-denominated bond of September 2023 and a Deutsche Bank note maturing in the same month was 80 basis points at the end of 2018 when fears of a no-deal Brexit have increased.
It currently sits at 5.5 basis points after falling sharply since April, reflecting investor confidence that London and Brussels would agree to a trade deal.
Chart: UK corporate loan premium –
5) LOWER FINANCES
With a large current account deficit and a pre-COVID-19 debt-to-GDP ratio of over 80%, Britain depends on international investor confidence in the UK economy and its markets.
Britain’s current account deficit, which is larger than that of many peers, fell sharply during the pandemic.
But the budget deficit is skyrocketing as the government increases spending to save the economy and the debt-to-GDP ratio approaches 100% – leaving less room for maneuver if the economy needs more support afterwards. the end of the Brexit transition period on December 31.
Chart: financial vulnerability –
Reporting by Ritvik Carvalho and Tommy Wilkes; Edited by Rachel Armstrong and Hugh Lawson