Yesterday was the 3rd anniversary of everyones favourite talking point, The Brexit Referendum.
In the off chance that you’ve been living in a cave, with your hands over your ears and no access to wifi, the referendum was a vote put to the British public, asking them whether or not they wished to leave the political and economic collective known as The European Union.
The voting public chose to leave.
Since then there has been constant confusion, delaying, anger and more confusion. The U.K. was supposed to have left The E.U. at the end of March 2019. The deadline was extended when a deal negotiated by the Theresa May led government and Brussels could not pass through the U.K. parliament.
Now we are told that October 31st is the new break up date…but even that isn’t likely to be the final date. It’s going to have more break up dates than Ross and Rachel. (Thats right kids! This isn’t your daddies economics blog!)
The predictions for the economic fall out from Brexit have ranged from “Britannia will rule the waves once again, as our dare-doing privateers go forth in search of new trading opportunities” to ” It’s going to be a Mad-Max-esque hellscape but with less cheese“.
The general consensus from economists has been that, at least, it won’t be a positive for the British economy, due to the disruption in trading with its largest trading partners.
However, one of the more noted financial indicators in Britain, the FTSE 100 Index of stocks, has risen 20% since the referendum.
Why is this?
Essentially there’s 2 reasons.
The make up of the FTSE 100
The FTSE 100 is the 100 companies that are listed on the London Stock Exchange with the highest market capitalisation. Total capitalisation of the index is approximately £2 trillion.
While they may be listed on the London Stock Exchange and regulated by U.K. financial law, many of the largest companies are not heavily reliant on the health of the British economy.
For example many of the worlds largest commodity linked companies are listed on the FTSE 100. Miners like Rio Tinto and Anglo American which are Australian and South African based rely very little on the British economy as their operations are largely centred in commodity producing regions like Australia, South America and Sub Saharan Africa. Their consumers are more and more centred in the growing Asian economies, such as China.
This is the same for large energy producers on the Index such as BP and Shell (Shell being the largest company on the FTSE). The majority of their production is outside of The UK in oil/gas producing regions, and their market is worldwide, of which the UK only makes up as small percentage.
Financials also make up a notable chunk of the index. Standard Chartered for example is a bank that has traditionally focused on emerging markets, which can be seen by the fact that 90% of its profits come from Africa, Asia and the Middle East.
HSBC(Hong Kong Shanghai Banking Corporation), the most profitable bank on the planet, which as its name suggests has traditionally focused on the Asian markets but is now a truly global entity is also listed. It has the second highest capitalisation on the index.
From these examples, we can see that for many of the major players in the FTSE 100, the economy of the U.K. isn’t a major component of the overall success of these firms.
As many of these firms are among the very largest in the index and because the larger the company the greater the affect it has on the overall index (The FTSE is calculated using a weighted average), the more these global firms skew the value of the index.
Perhaps a better indicator of the health of the economy would be if one was to look at the success of the FTSE 250, which includes smaller companies(from 101-350), most of which are British based companies which rely on the British consumer.
The affect of GBP depreciation.
While the FTSE 100 may have increased 20% in value, it must also be noted that the value of the British Pound Sterling (GBP), has depreciated 12% in the same time range.(Using the U.S. dollar as a comparison).
As the GBP decreased in value, the “value” of the shares will increase in numerical terms. As all shares on The London Stock Exchange are valued in GBP, it will appear that their “value” has increased, although all that’s truly happened is that the currency they are now priced in, is worth less. Their true value is largely unmoved.
Once we know this, we can see that a large proportion of the “increase” in value of the index is simply the fact that the companies on the index are now priced in a currency that is noticeably less valuable.
Overall, it is hard to say how much of an impact Brexit has had on the British economy. Despite the seeming cloud it has cast over the nation, unemployment is the lowest it’s been since the mid 70s. It remains among the most prosperous nations in Europe despite under-performing other major European economies in recent years.
It is however important to say that while Brexit has been voted for and signals have been sent about what a post Brexit relationship with The E.U. will look like, Brexit itself has yet to come to fruition. It will be impossible to truly tell the effects of Brexit until perhaps a decade or more into the future.
All that can be said from this article is that the results from the FTSE 100 are not an adequate representation of the health of the overall UK economy due to its results being skewed towards global firms, whose reliance on the British economy is minor, and due to currency exchange rate fluctuations upon which shares are priced.
For whats it’s worth, I’m pretty sure there’ll still be cheese….fingers crossed.
Dukemusings 