How does Brexit affect the stock market?

Brexit has upended the UK’s political system. Our own parliament is now in control and our political leaders are once again elected by us. But what does Brexit mean for our stock market? Will it be good or bad for the shares in your portfolio? Which stocks will benefit, and which will struggle under the new arrangements?

How are Brexit and the stock market linked?

The first thing to keep in mind is that, in and of itself, Brexit does not inherently benefit or undermine the UK stock market. That’s because Brexit merely decided who makes our laws, not what laws they make.

In other words, Brexit reassigns power from the European Commission to the UK Parliament. So, we may be free to govern ourselves in future. And that is both good and likely to benefit us, especially over time. But is also means being free to make our own mistakes. Mistakes that could cause trouble.

That said, Brexit’s side effects have already had an immense effect on UK stocks.

Brexit’s impact on the UK stock market so far

After the UK voted to leave the European Union, the UK’s stock market began an 18-month run to record highs. Indeed, as the Guardian reported at the time in its article “Post-Brexit crisis, what crisis? The FTSE 100 is roaring ahead”, stocks quickly recovered from the referendum result: “It has taken just a week since the shock EU referendum vote for the best FTSE 100 performance in years”.

But what about when Brexit actually happened? Well, within weeks of the UK officially leaving the EU on 31 January 2020, the pandemic took hold of global stock markets. Stocks crashed worldwide, particularly energy stocks, which play a significant role in the UK market.

The pandemic also sidelined the government’s plans to capitalise on Brexit’s opportunities. But in 2022, the signs for the UK stock market are once again looking good. The FTSE 100, a measure of the value of our biggest companies, outpaced the rest of the world in the first quarter.

What does Brexit mean for the UK stock market’s future?

We don’t yet know what policies the UK government will enact with its new-found powers and independence. And we don’t yet know how they will diverge from what the European Commission mandates inside the EU. This makes it very difficult to predict what Brexit means for the UK stock market going forward. But we do know that some things are likely.

1. An opportunity to deregulate the economy – Big Bang 2

Brexit creates an opportunity to deregulate the economy, a sort of Big Bang 2, echoing Margaret Thatcher’s deregulation of the City of London. Her reforms turned London into a global financial centre to rival New York, and left the rest of Europe behind.

But Brexit means an opportunity for all of our economy to be released from the ball and chain of overregulation in much the same way.

This won’t happen overnight… or even fast. But it could happen in certain key industries, just as it did in the 1980s. And you could stand to profit by investing in them.

2. Open trade with the world, instead of the EU

The EU may seem like a free-trade zone, but it is actually a protectionist bloc which excludes goods and services from the rest of the world, as our Brexit negotiators discovered.

But, outside the EU, the UK can pursue trade deals which the EU would never be able to get all its nations to agree to. This means increasingly efficient trade. The UK’s freeports are just the beginning.

3. A rising pound?

If you believe that Brexit will be a success, then you also likely believe that the pound will rise over time. The investment implications of this are enormous, particularly for the UK stock market.

Many large UK stocks, which UK investors are likely to own, are big multi-national companies with a lot of sales in foreign currencies. When the pound rises, this reduces their profits, and so their share prices lag.

In fact, one reason the UK stock market boomed after the Brexit referendum is that the pound tumbled, which pushed up the value of UK stocks.

Investors need to beware of the effect that a rising pound might have on their investments.

Stocks to invest in after Brexit

The financial sector

The UK’s financial sector has been struggling under some of the EU’s stranger regulations for decades now. Therefore, these days, the City is keen to benefit from Brexit instead of disparaging it.

In February, The Telegraph reported that “City chiefs [are] to unleash £80bn Brexit ‘Big Bang’ as ministers scrap EU red tape”. And, as expected by Brexiteers, “Relaxing of EU rules will spur investment in UK economy, say insurers”.

If you’re wondering why bankers have had such a change of heart over Brexit, here’s your answer, from Bloomberg:

London Bankers Seen to Be Primed for Bigger Bonuses After Brexit

• Lloyd’s of London chairman says U.K. is now free from EU rules
• British banker bonuses have been capped relative to base pay

The London Stock Exchange

A government that can make, or remove, rules that hold back our largest industry should free up that industry’s share prices, too.

This may be particularly true of the London Stock Exchange itself, which could develop its reputation as a great international location to list companies and raise capital.

If the UK decides to embrace global trade, instead of limiting itself to the EU, then companies that trade with nations outside the EU currently are set to benefit from the new trading arrangements. Importers and exporters that can take advantage of this should see their share prices surge.

But it’s not all about international trade. What about the domestic economy? Well, UK GDP growth topped the G7 in 2021 and will again in 2022, according to the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD). If Brexit continues to feature economic outperformance, that is great news for companies operating within the UK, which will make bigger profits that they pass on to shareholders.

What you can do to prepare?

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