Although UK stocks as measured by the FTSE 100 and FTSE 250 ex Investment Trust indices (see Chart 1) have delivered positive absolute returns since the start of 2016, UK equities have structurally underperformed global equities over the same period (Chart 2). This is reflective of both the strength of the performance of global equities (particularly the US) and investors factoring in a risk premium for UK equities as Brexit uncertainty built.
While the FTSE100 and FTSE 250 ex Investment Trust have delivered positive absolute returns since 2016…
…UK equities have significantly underperformed global equities.
The main impact that Brexit uncertainty has had on UK equities is via a valuation shift:
The chart below shows that since 2016 the UK 12-Month Forward PE ratio has declined from around 16x (prior to referendum) to 13x and is one of the few markets to have witnessed a sequential de-rating over the period.
In fact, the UK equity market PE now stands at a discount to European equities having been at a premium at the start of 2016.
The key barometer of the ebbs and flows of Brexit sentiment over the last year or so has been sterling.
The swings in sterling have impacted the rotation between UK stocks with either domestic or overseas revenue exposure. In the chart below, it can be seen that the recovery in sterling in the latter part of 2019 saw domestic oriented stocks significantly outperform.
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