Triggering Article 50 means little to high-performing firms. Will more join them?
Predictions of Brexit’s effect on the economy and financial markets tended to fall into two categories: doom and gloom. Yet, since the Leave result in the referendum of June 23, 2016, certain sectors and industries have outperformed experts’ expectations and even bettered the hopes of the most optimistic industry insiders.
The day after the referendum, a pattern began to emerge that would go on to be a significant indicator of ‘Brexit boom’ firms. “On June 24, 30 FTSE 100 companies were up on the day and they could almost exclusively be labelled as companies with foreign earnings that report in sterling,” says Sam Wright, a senior investment manager at Investec Wealth & Management. “The 25 per cent decline in sterling since then has helped such companies enormously.”
Wright points to the mining and commodities sector as one with many of this type of company, and as such it has been one of the best performing sectors since June 2016. Wright says “the mining sector already had momentum from improved commodity prices, a result of positive economic news on the demand side. The foreign currency shifts following the June vote then provided further tail winds for the numbers reported by these companies.”
People thought diminishing confidence for borrowing money would impact on the banking sector, but relative to the FTSE, it’s up 10 per cent since the Brexit vote
Also doing well are technology companies. “One of the main constituents of that sector was ARM Holdings, which was taken over by the Japanese company Softbank in July last year,” says Wright. “One of the reasons [the sector] looked more attractive after Brexit was the weakness of sterling. Buying in yen quite suddenly became 25 per cent cheaper and the premium to be paid for acquiring a company didn’t look as high as it once did.”
Even more surprising, according to Wright, has been the performance of banks.
“A lot of people thought that diminishing confidence for borrowing money would impact on the business banks do, but the banking sector, relative to the FTSE, is up 10 per cent since June 24 last year.”
“On top of that,” Wright continues, “economic news around the world has been pretty strong, compared with what might have been expected given the general political news of last year and early 2017. There has been an improving interest rate environment for the banks, whose margins tend to go up when interest rate cycles move upwards. The Fed in the US, which might have three or four interest rate moves this year, is going to be a leader of that globally.”
“The smaller challenger banks in the UK had a dreadful day on June 24th. If you are a Shawbrook or an Aldermore or a Virgin Money, you were looking at a 30-40 per cent drop in value on the day after the referendum. But since then, they have seen quite a turnaround. Some are gaining market share rapidly because they don’t have the legacy problems that the bigger, older banks have – PPI, for example.”
“But if you look at the older names: Barclays fell about a third on the day after the referendum and has recovered to be way above its price on the day of the referendum. That’s probably down to having some of its balance sheet in dollars, greater optimism in the global economy in the last six months and the improving interest rate environment.”
The fine art market has also increased since the Brexit vote. The UK auction market in particular has been “incredibly strong”, says Morgan Long, Senior Director at The Fine Art Group, which advises art funds and offers private collectors guidance on financial and artistic matters.
“Christie’s had its 250th anniversary sale the day after Brexit, which was incredibly strong. There were strong [fine art] sales in October 2016 and then in March this year, there were some of the strongest sales ever seen in London.”
“We were expecting people to have a little shaken confidence in people consigning items for sale in the UK, but that didn’t happen. Plus, a lot of the buyers are coming to the sales from overseas: the US, Asia and the Middle East, primarily. Using the value of the pound against the dollar as the benchmark, things coming up for sale in the UK are, seemingly, available at a little bit of a discount.”