How is the Stock Market affected by Brexit?

Identifying where to invest in the UK stock market after Brexit is a priority for all traders. Besides, people involved in the forex trading sector cannot forget the referendum result in June 2016, when huge moves were seen in the UK stock market, so they will possibly want to try and capitalise once again.

UK equities have performed less than expected ever since the UK public voted to leave the EU in the 2016 referendum. Covid-19 in the early 2020s only worsened things, pushing the economy of the UK to its worst decline in the past 300 years. This caused a shift from UK’s assets to more high-yield markets such as US equites in the technology sector.

Nonetheless, the suppressed asset prices of recent years, turned UK equities into one of the cheapest stock markets worldwide. This is only one out of multiple reasons why traders are eager to understand the impact of Brexit in detail, as it could turn out to be surprisingly beneficial in the long-term.

Brexit impact on the Stocks

Many investors were surprised after the Brexit referendum, since the UK Stock Market moved higher after the vote, with a lot of brokers profiting off in USD. As a result, pound volatility significantly influences the UK stock market. A chart from the FTSE 100 shows that 97% of companies have head offices in the UK from which only 28.9% of the total earnings generated comes from the UK.

For instance, imagine that the GBPUSD exchange rate was trading at 1.5000. It means that every $1,000 profit would be £666 (1,000 / 1.5). If the UK pound was not strong enough and the exchange rate fell to 1.2000 that means that the same $1,000 of revenue would now be worth £833 (1,000 / 1.2).

How are companies affected?

Brexit’s impact will depend on the company’s business model, which plays a significant role. The key in answering the most popular questions such as “How is Brexit going to affect the stock market?’’ lies in what really is happening with the British pound:

• If investors are positive on the economic potential of a country’s currency, it will rise. This is the result of a huge economic situation during which banks increase interest rates so that they ensure inflation does not move higher. Therefore, to access these interest rates, large asset managers will buy bonds in the respective currency.
• If a country’s economic prospects are not certain or good enough, then traders will move money into another country to find better deals. Consequently, the country’s currency will fall, something that we have seen during and after the Brexit referendum.

Stock Market Ideas – Brexit

As previously discussed, sterling’s movement can greatly influence the stock market and the price movement of individual shares. Being ready to face the negative impact of Brexit, means having ways through which companies will be able to perform well with a weak sterling. The possibility of a hard or no-deal Brexit is expected to weaken the pound, whereas a Brexit deal will offer some boost to the pound.

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This information is not considered as investment advice or an investment recommendation but is instead a marketing communication.