Brexit Breakdown: Analysing the Impact of Brexit on the UK Stock Market

Brexit Breakdown: Analysing the Impact of Brexit on the UK Stock Market

Since the Brexit decision in June 2016, the UK’s financial markets have been plagued by uncertainty, with the British pound plunging and stock prices falling behind every other major market. 

The pound sterling experienced a decline of about 17% in value in 2022, along with the 16% fall it suffered a couple of years ago. This decline has brought about the high cost of goods, assets, and services for residents in the UK. Additionally, it led to rising inflation, which has weighed heavily on the country’s economic health.

Was Brexit the best decision for the UK Government, considering the decline in stock prices? Read on as we assess the impact of Brexit on the British stock market. 

Market Volatility and Uncertainty Caused by Brexit

The UK stock market experienced volatility leading up to the Brexit referendum because investors were unsure of the outcome. Market volatility rose as investors worried over the long-term effects of Britain’s decision to leave the European Union. The three-year wait before the final exit brought about a lot of uncertainty and decreased investment by UK companies by about 11%. For instance, 30% of companies in the UK named Brexit as one of the reasons for the uncertainty in the Bank of England’s DMP (Decision Maker Panel) survey at its inception in 2016.    

Due to this level of uncertainty, UK investors must be vigilant concerning other factors that could affect the stock market. For example, investors can monitor the economic calendar this week to be up-to-date on news announcements regarding stock market events. The calendar provides information on various economic indicators, news, and announcements concerning the financial market entirely. 

Furthermore, the FTSE 100 initially fell after the referendum due to investors’ fears about the potential adverse effects of Brexit on the UK economy. The FTSE 100 is a stock market index that measures the performance of the largest 100 companies listed on the London Stock Exchange (LSE).The decrease was more severe for the FTSE 250, which fell by 7.2% immediately after the exit, resulting in a fall of the GBP to about 8% against the USD and 6% against the Euro. Keep in mind that the FTSE 250 is made up of companies with a stronger domestic concentration. These businesses were hit hard by the unpredictability of trade agreements, single market access, and prospective regulatory changes.

Sectoral Shifts and The Economic Recovery After Brexit

The initial shock of the Brexit decision was met with turmoil in the UK stock market, but the market has since recovered. The declining value of the pound helped facilitate this revival by increasing the allure of British businesses to foreign investors. Since the FTSE 100 comprises huge multinational firms with extensive global market exposure, the weakened pound benefitted exports and overseas earnings.  Incidentally, 70% of the revenue of FTSE 100 firms came from overseas; hence, a weak pound sterling made UK exports competitive on the global market and shot up the value of their overseas earnings. 

The revival of the UK stock market, however, was not widespread. Uncertainty persisted for businesses in industries such as transportation, aircraft, and pharmaceuticals that rely significantly on EU trade but were vulnerable to trade barriers and regulatory shifts. Some corporations’ stock prices dropped due to executive talk of moving operations elsewhere or slowing investment.

Technology, healthcare, and renewable energy, which were less vulnerable to the effects of Brexit, continued to show resilience and even growth. These industries are less reliant on EU trade and more exposed to global markets. Many companies in these industries fared well on the stock market because investors saw promise in them for sustained growth.

Constant Uncertainty and the Way Forward

While the UK left the EU on January 31, 2020, several questions remain about the nature of their future relationship. The stock market in the United Kingdom will remain sensitive to the results of current trade negotiations and regulatory frameworks.

The mood of investors still depends on what happens with Brexit. Markets are susceptible to rumours of impending disruptions in trade, tariffs, or regulatory hurdles. Conversely, market performance can be driven by positive developments like trade agreements and regulatory clarity, which increase investor confidence.

The direction of the UK stock market is heavily influenced by international factors such as geopolitical tensions, macroeconomic data, and central bank policies. Therefore, examining the larger economic context when assessing Brexit’s effect on the stock market is essential. 

The effects of Brexit on the UK stock market are undeniable: increased volatility, sector-specific differences, and persistent uncertainty. There was a rebound in stock prices after the first drop; however, it was not uniform across industries. Businesses with wider international reach and less dependence on EU trade did well, while those with a narrow focus on the EU market continued to struggle. Investors should carefully monitor Brexit events and other global issues to make prudent decisions in the changing post-Brexit landscape.

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