By Christopher Vass, Peter Gunthorp, and Martin Howard
As we write, the Brexit trade deal is being rubber-stamped across Europe, and the FTSE 100 is up in post-Christmas trading. The UK remains by far the largest equity market in Europe, even though the FTSE 100 stocks have underperformed European equity markets by 40% the last five years.
If we examine the days after the Brexit vote, in local currencies the FTSE 100 did not sell-off more than the broader European equity markets. This is because this index has a higher percentage of ex-UK revenue. Conversely, the overseas activities by UK companies in the FTSE 250 index were said to be imperiled by the prospect of the UK leaving the European Union. So FTSE 100 vs. FTSE 250 has been seen as a tool to express views on the Brexit negotiations and future outcomes.
An alternative way would be to group companies by foreign and domestic sales instead of market-cap. Comparing the performance of the FTSE 350 Domestic Exposure Index (companies with high domestic sales) and the FTSE 350 Global Exposure Index (companies with high global sales) reveals a clear pattern— companies with high global sales fared better. The Global Exposure Index outperformed the Domestic Exposure Index with 17% the following two days after the vote.
Global exposure has continued to outperform the Domestic counterpart with 40% as of December 8, 2020. A closer look at the Industry exposures reveals that overweighting Healthcare, Consumer Staples, and Basic Materials has been the biggest reason for outperformance for the FTSE 350 Global Exposure Index compared to the FTSE Domestic Index.
But this is old news. What are the indexes telling us today? Of late, the Domestic Index has outperformed.
This suggests that the market has been pricing in a favorable deal for the UK. But companies with mainly domestic sales have a lot of catching up to do. With the performance spread, a wide valuation spread has also appeared. As the chart shows the discount of the Domestic Index vs. the Global Index fell ahead of the 2016 referendum, and has stayed stable between 30-40%. In late 2019 it started to narrow before Brexit, and stayed there until September this year, but today the discount is 30% again. One analysis of this is that Domestic has still a lower valuation than the Global and has room for multiple expansion to get back to historic valuation levels.
Subscribe to our blog.
© 2021 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE Canada”), (4) MTSNext Limited (“MTSNext”), (5) Mergent, Inc. (“Mergent”), (6) FTSE Fixed Income LLC (“FTSE FI”), (7) The Yield Book Inc (“YB”) and (8) Beyond Ratings S.A.S. (“BR”). All rights reserved.
FTSE Russell® is a trading name of FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB and BR. “FTSE®”, “Russell®”, “FTSE Russell®”, “MTS®”, “FTSE4Good®”, “ICB®”, “Mergent®”, “The Yield Book®”, “Beyond Ratings®” and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, MTSNext, FTSE Canada, Mergent, FTSE FI, YB or BR. FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator.
All information is provided for information purposes only. All information and data contained in this publication is obtained by the LSE Group, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, such information and data is provided "as is" without warranty of any kind. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or of results to be obtained from the use of FTSE Russell products, including but not limited to indexes, data and analytics, or the fitness or suitability of the FTSE Russell products for any particular purpose to which they might be put. Any representation of historical data accessible through FTSE Russell products is provided for information purposes only and is not a reliable indicator of future performance.
No responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any error (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this document or links to this document or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of the LSE Group is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.
No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing contained in this document or accessible through FTSE Russell Indexes, including statistical data and industry reports, should be taken as constituting financial or investment advice or a financial promotion.
Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back- tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.
This publication may contain forward-looking assessments. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking assessments are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially. No member of the LSE Group nor their licensors assume any duty to and do not undertake to update forward-looking assessments.
No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group data requires a licence from FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB and/or their respective licensors.
