On 24 June 2016, the British people voted to leave the European Union after a dramatic and longstanding political battle that nearly divided the nation. That day marked the beginning of the tumultuous Brexit journey. By July 2016, Theresa May became Britain's second female Prime Minister with a clear political mandate to negotiate with the European Union and initiate the legal process of leaving the EU.
On 29 March 2017, Article 50 was officially invoked and marked the beginning of a two-year period, after which the UK would officially cease being a member of the EU. After months of negotiations, British cabinet and EU negotiators reached an agreement that would pave the way to a smooth separation. However, Theresa May never succeeded in pushing the deal through Parliament. Ultimately, the deadline was extended until 31 October 2019. Shortly thereafter, Theresa May announced on 24 May her resignation as Prime Minister after losing the support of her own party over her failure to deliver Brexit. At this time, it seems likely that pro-Brexit Boris Johnson will replace her as Prime Minister. Bearing in mind this political drama, it is interesting to look at what happened to UK markets during this same period.
First and foremost, the Sterling strongly depreciated against the currencies of its major trading partners. After reaching a decade high of 0.7£ per Euro for most of 2015 the Pound quickly dropped to 0.85£ per Euro shortly after Brexit was announced (as at 06 July 16). Since then, it has been trading within a narrow range of between 0.85£ per Euro and 0.92£ per Euro. Each time the political chaos intensifies, the currency goes to higher end of that range. The same is true with the parity against the US Dollar. The Pound has depreciated to 1.26 USD, not that far from its historic 40 year low (as at 10 June 2019).
In the near-term, the outlook remains unclear but make no mistake, a hard Brexit would imply a sharp drop in the Sterling. The stock market however exhibits a different trajectory. The FTSE 100, the UK's main equity benchmark, is close to its all-time high. The stocks of export-oriented British companies, for example operating in the natural resources sector, have pushed the index higher while companies with domestic exposure are suffering. UK stocks are now trading based on one of the lowest Forward P/E ratios compared to their major developed peers and offer one of the highest Dividend Yields.
This could provide some support to the market in the event of a hard Brexit. In the Rates market, the Bank of England, divided between the relative strong economy and the evolution of the exit process, has kept a neutral tone. However, the 10y GILT has followed the unprecedented global rally and reached as of late an all-time low of 0.81% in early June 2019.
Jean-François JOLIVALT, multi asset fund manager, La Française AM