Brexit has had a dramatic impact on the returns from the UK stock market with many companies that derive the majority of their earnings from the domestic economy struggling to make any headway, whereas those whose business is mainly abroad have surged ahead.
In order to measure and monitor this effect the index provider, Bats, which is part of the CBOE group, has created two new indices: the Bats Brexit High 50 and the Bats Brexit Low 50. You can see the data on their website.
The High 50 consists of the 50 companies in the Bats UK 100 Index that derive the largest portions of their revenues from the UK. These include stocks such as Admiral Group, Associated British Foods, Aviva and BAE Systems that on average earn 72% of their money from this country.
The Low 50 contains those companies that derive the smallest portions of their revenues from the UK and on average the figure is just 10%. These include the likes of 3i Group, Anglo American, Antofagasta and Ashtead Group.
Since the EU referendum on 23 June 2016, the Bats Brexit High 50 Index is virtually unchanged – it dropped by about 20% on the result, but has since clawed back its losses, whereas the Bats Brexit Low 50 Index is up around 27%.
This staggering difference in the performance suggests that UK-listed companies that generate a large portion of their revenues from outside the country have fared markedly better than those that depend more on the local economy. This is partly due to the fall in the value of the pound against the US dollar and the euro that makes the value of overseas earnings that much greater when translated back into sterling.
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I am not aware of any ETFs or index trackers linked to the High and Low Brexit indices, but there is a more indirect way that you could benefit from the Brexit effect if you believe that the sell-off affecting domestically orientated UK businesses has gone too far.
The country’s best known fund manager, Neil Woodford, thinks that many of these stocks are undervalued and offer an excellent opportunity that he has positioned his funds to take advantage of.
He believes that many areas of the financial markets are in bubble territory and when it bursts these domestically-focused businesses will come back into fashion in the same way that the old economy companies did when the tech stocks crashed in the year 2000.
Woodford has had a poor 12 months with his £8 billion flagship CF Woodford Equity Income fund flat on the year and his CF Woodford Income Focus fund losing money since its high profile launch in March. If he is right about the reversal in fortune of these domestic companies – and he has a habit of getting the big macro decisions spot on – his funds should bounce back strongly.