January 24, 2020

Countdown to Brexit: U.K. Equities Performance

by Tajinder Dhillon.

Brexit uncertainty has impacted U.K. equities performance relative to global benchmarks.  The FTSE 350, an index of the 350 largest U.K. companies, has increased 20.4% since 2019, while its U.S. and European counterparts have risen 34.0% and 28.8% respectively. Global equities represented by the FTSE All World index gained 29.2%.

Looking at the FTSE 350 in more detail, we observe domestically-focused U.K. companies outperforming their global multinational counterparts. The FTSE 100 consists of several international companies who derive a significant portion of revenue outside the U.K., whereas the FTSE 250 consists of companies with domestic revenue exposure.

The FTSE 250 has outperformed the FTSE 100 substantially since 2019, increasing 28.0% vs. 18.9%.  While a cheaper sterling benefits the FTSE 100, global multinationals are faced with considerable uncertainty around Brexit — which increases the risk profile for investors.  In comparison, investors appear to favor smaller companies in the FTSE 250 that are more domestically oriented and in an agile position to adapt to a range of Brexit outcomes.

At an aggregate level, both revenue and earnings growth expectations have declined for the FTSE 350 looking into 2020, according to I/B/E/S Global Aggregates.  From peak to trough, 2020 revenue growth expectations have declined from 3.1% to 1.9%, while earnings growth expectations have declined from 8.4% to 7.3%.

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