Yesterday (June 24) marked the second anniversary of the EU referendum result, and despite all the political wrangling, we still don’t seem to be any closer to knowing what sort of impact Brexit is actually going to have on the UK economy and local businesses.
When the surprise result was announced two years ago it prompted a sharp drop in the FTSE 100 index and the value of sterling plummeted on the foreign exchanges. These extreme moves have contributed to the wide discrepancy in the performance of different UK stocks and funds.
The best performing FTSE 100 shares since the referendum mostly consist of mining stocks such as Glencore (LON:GLEN), Anglo American (LON:AAL), Antofagasta (LON:ANTO), Rio Tinto (LON:RIO) and BHP Billiton (LON:BLT) with gains of between 88% and 145%. All have profited from the fall in the value of the pound and the general increase in commodity prices.
The FTSE 100 index is up 30.2% in the two years since the vote
Despite the initial sharp sell-off the FTSE 100 index is up 30.2% (with dividends reinvested) in the two years since the vote. A significant proportion of its underlying earnings are generated overseas and these have benefited from the weakness in sterling and the strong economic growth in markets such as the US.
It is perhaps more surprising that the domestically-oriented small caps have done better than their large cap peers with the FTSE Small Cap index up 37.7% with dividends reinvested and this is reflected in the performance of the relevant funds.
According to data from FE Analytics, in the period from 23 June 2016 to 13 June 2018, the average UK Smaller Companies fund generated a total return of 48.6%, which was well ahead of the 30.5% produced by the average UK All Companies fund that has the scope to invest in the large and mid-cap stocks.
£7.9 billion has been withdrawn from UK equity funds since the referendum
These are all decent numbers, yet the Investment Association’s stats reveal that £7.9 billion has been withdrawn from UK equity funds since the referendum, despite the total net inflows into funds over this period hitting £61 billion. The exodus probably reflects investor fears over Brexit and the stronger returns available elsewhere.
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Analysis by Chelsea Financial Services shows that the five best performing UK Equity funds since the referendum are: TM Cavendish AIM (91%), Jupiter UK Smaller Companies (89%), Old Mutual UK Smaller Companies Focus (88%), TB Amati UK Smaller Companies (74%) and FP Octopus UK Micro Cap Growth (68%).
One reason for their strong performance is that the small cap stocks were widely avoided in the run up to the referendum and their valuation moved to a 20% discount compared to the FTSE 100. This gap has since closed to 10% as the UK economy has held up better than expected.
With the politicians battling it out, it seems that everything is still to play for and almost any result is possible when we finally leave the EU next March. Investors with a strong nerve who are willing to take a gamble and pre-empt the outcome could make a handsome profit, but only if they are willing to accept the losses in the event that they end up on the wrong side of the trade.