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Brexit: Three years on

It is now three years since Britain voted to leave the EU (in case anyone needed reminding). We are all aware of never-ending twists and turns in this saga, even if we are none the wiser as to the final conclusion. But, we ask, with the benefit of hindsight, how have financial markets moved since the referendum vote? And are there any lessons readers can take from this experience for thinking about how to invest when faced with uncertainty today, or, indeed, at any time in the future?

I have calculated returns for a UK-based investor from the close on the 24th June 2016, on the basis that markets had already moved by the time they opened following the referendum, to Friday 14th June 2019. The returns calculated are based on conventional indices and therefore do not take into account any management or transaction costs an investor might incur.

The results might not seem surprising but that is largely the illusion of hindsight. There was, at the time, widespread concern over the health of the global economy and the referendum result was viewed as a major negative shock. Investors who place a significant weight on valuation signals would have come closest to predicting the pecking order of asset returns, but the magnitude of those returns is a huge surprise to almost everyone’s expectations at the time. The results are fascinating and instructive in equal measure.

When things feel most uncertain, the natural inclination is to seek safety and for most investors that means keeping your money in the bank or similar alternatives, such as a money market fund. While this offers peace of mind in the short-term, it is unlikely to with time once you realise that the opportunity cost of safety has been so large. Money market funds or cash deposits have generated very low returns (only 0.3% per annum for money market funds and generally below 1% p.a. for savings deposits), hugely underperforming what someone might have earned staying invested in the markets.

Alternatively, a basket of global equities (currency unhedged) has generated extremely attractive returns. The MSCI World index has gained over 52% including dividends over the period, when measured in sterling, an annualised rate of return over 15%. Emerging markets did very well also, returning 47% in sterling terms over three years. Part of the gain on overseas assets is down to the weakness of sterling, but even on a US Dollar basis, the MSCI All-Country World Index is up 35% including dividends in sterling terms.

Similarly, UK equities have performed very well, if not quite as strongly as overseas markets. The FTSE 100 has gained over 35% (equivalent to over 10% p.a. return), with a large proportion of the return coming from dividends. UK mid-caps and small caps also generated positive returns gaining 29% and 37% respectively, including dividends.

Investors were also rewarded for taking risk within the bond market. Global High Yield Bonds returned nearly 30% (or over 9% annualised) in sterling terms, or 17% if you had hedged currency risk (5% p.a.). Emerging market bonds generated returns of 27% (hard currency, in GBP) and 25% (local currency, in GBP), or around 8% per annum for sterling-based investors, currency unhedged.

Investment grade (IG) corporate bonds have not quite kept up with riskier asset classes, but still delivered attractive returns well in excess of deposit rates. The global IG corporate index gained over 18% (nearly 6% p.a.) in sterling terms unhedged, or 8% (nearly 3% p.a.) after hedging currency risk. UK investment grade corporate bonds have delivered a 16% return (5% annualised return).

Finally, largely as a result of developments over the past six months, government bonds are now ahead of the returns on cash deposits. The UK gilt total return index has delivered 9% (3% p.a). In sterling terms, European and US government bonds have returned around 4-5% annualised but most of this has been because of sterling’s depreciation. If you had hedged the currency, returns from European and US government bonds would have been around 2% p.a. and 0% p.a. respectively. So ‘safe haven’ returns (i.e. government bonds and cash) have significantly underperformed riskier assets.

What can we learn from this experience? With the caveat that this is a sample of one, the experience is instructive. First, when things seem highly uncertain and risky, the rewards to safety are going to be low and, over time, seeking safety is likely to be an expensive decision in terms of opportunity cost. This is especially true if risky assets are offering high implied risk premia, as was the case for equities, corporate bonds and emerging markets in mid-2016. Second, while Britain’s attention has been focused mostly on Brexit, it is far from the most important factor driving asset prices globally. Corporate profitability, the global inflation regime and central bank interest rate policies are things that are probably far more important in the long run. It is easy to be mentally absorbed in the risk event of the day – Brexit, trade wars, elections etc – but doing so is likely to lead to decisions which are sub-optimal in the medium-to-long run.

The parallels between June 2016 and today are very apparent: there is widespread fear over global growth, government bond yields are extremely low and the equity risk premium is high (although corporate credit spreads are less wide). Uncertainty and the risks facing investors feel very high. The last three years saw surprisingly strong corporate profits growth and solid global GDP growth, and we probably should not expect outcomes as good in the period ahead. Nevertheless, expected relative returns as implied by valuations suggest equities should outperform government bonds and cash in the period ahead as well, probably by a substantial margin.


The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.