It’s been many years since the United Kingdom voted to leave the European Union, and as of January 2021, after a year’s transition period, the UK officially left the Single Market. No-one could have expected that it would take so long after the EU referendum for a deal to be agreed upon, neither would they have thought a pandemic would have also had its effects.
In 2020, the UK economy saw its worst recession in over 300 years, with the UK stock market dramatically underperforming, and experiencing its worst levels since 2008. But, with the Brexit trade deal seemingly now finalised, the news of COVID-19 vaccines in the UK, and the Financial Times Stock Exchange 100 Index (FTSE 100 Index) seeing a promising start to 2021, what lies ahead for the UK stock market?
Following the Brexit agreement on 24th December 2020 and the beginning of the new year, the FTSE 100 appeared to have an increase in online stock trading, as a short-term aftermath to the news of the agreement between the UK and EU. The British Pound also experienced a rise in price, reaching to a point not seen in over two years. However, it is far from a full recovery from the devastatingly weak show of business investment in the UK since the Brexit referendum. A report from the Office for National Statistics (ONS) showed that investment was down 19% in the year to September, even though there was a slight recovery of 9% in the last quarter.
Political uncertainty of Brexit has seen UK shares undervalued compared to the other key world markets such as Europe, the US and Japan, with some investors avoiding the UK stock market completely. A rise in interest in the technology sector, a likely effect of the pandemic and the upward trend to online shopping, working from home and digitalisation, has also seen investors turn to the US market. This market includes stocks in the likes of Facebook and Apple, which the FTSE 100 Index cannot compete with, due to lacking in this type of technology stocks.
However, the recent agreement between the EU and the UK means that the uncertainty of the Brexit deal can now be removed, and perhaps will have investors rethinking their position on UK stocks. There is also the benefit that the trade deal means that no tariffs will be added to the trading of goods between the UK and EU, allowing for some cooperation between the trading partners.
On the other hand, investors can use this time to expand their portfolio into international markets and a range of assets, and profit from the boom in other financial markets. Furthermore, a resulting weaker pound in some cases can be beneficial, as multinational companies in the FTSE 100 Index make their revenues and earnings internationally.
Some investors have already prepared for the outcome and effects of either a Brexit deal or no deal, by investing in assets that will have been the least impacted by the results, as well as the ongoing volatility in the value of the pound. Lloyds Bank in particular has appeared to be a safe haven and has continued to rise over the month of January 2021.
Brexit hasn’t been the only factor affecting the UK stock market, as the continuous threat of the coronavirus has hugely impacted the economy and financial markets. The ONS reported that the UK economy was 7.9% smaller in October than it was pre-lockdown, despite recovering ground since April. However, the market has seen an improvement since the UK was the first to approve and carry out two types of COVID-19 vaccines, to its public.
Looking forward, there is the possibility of a long recovery ahead for the UK stock market with the lasting effects of Brexit and the pandemic. But it’s also worth remembering the long-term goals of the investments in your portfolio during turbulent times in the UK market.