Fund investors go global three years on from Brexit

While the IMF points to negative growth ahead, UK equities have been climbing back.

• interactive investor looks at the impact on UK markets and sterling 

interactive investor, the UK’s second-largest platform for private investors, takes a look at the UK three years on from Brexit, as well as how UK markets and sterling has performed since the UK left the European Union.

Investors choosing collective investments to help spread risk have been going increasingly global over the past three years. Looking at investment trusts, funds and ETFs combined, only two of the most-bought investments were UK focused – ii Super 60 rated City of London Ord (LSE:CTY) Investment Trust and also iShares Core FTSE 100 ETF GBP Dist (LSE:ISF).

However, for investors investing directly in stocks, only one overseas company makes the top 10 over the past three years – Tesla Inc (NASDAQ:TSLA).

ii’s analysis coincides with the International Monetary Fund’s latest economic forecasts, which it released overnight, and make for grim reading. After months of uncertainty and recessionary fears, the IMF has officially predicted that the UK will be the only G7 economy to fall into negative growth this year.

Nevertheless, it seems UK equities are holding up rather well against this grim economic backdrop. After all, in terms of total returns, the FTSE 100 is up 18.3% over three years, according to SharePad to 27 January 2023 versus 16.4% for the FTSE All World, although the FTSE All-Share is slightly lagging, up 15.7%.

Examining this further, Victoria Scholar, Head of Investment, interactive investor, says: “Quantifying the impact of Brexit specifically on UK markets is a real challenge given that it has been clouded by a series of factors. A lot has been happening, including the war in Ukraine, the impact of last year’s mini-budget, snarled up post-pandemic supply chains, and, of course, the ramifications of the Covid-19 pandemic.

“When we look at the UK’s major indices, we can see a mixed picture over the last three years. The FTSE 100 has gained around 7% since the UK left the EU on 31 January 2020. Complicating the picture, of course, was the pandemic, which catalysed a major global market-sell off in February and March 2020.

“More than a third of the UK index’s value was wiped off from the January high until the March low. However - since the nadir, UK equities have been climbing back, with the FTSE 100 now close to its record high.

“Rising interest rates and surging commodity prices meant that the UK index was much more resilient than the FTSE 250 or its European or US equivalents last year, thanks to gains for a number of FTSE 100 heavyweights including BP (LSE:BP.), Shell (LSE:SHEL) and Standard Chartered (LSE:STAN).”

The impact on sterling

Scholar adds: “Cable (GBPUSD) is trading down by around 6% since the official Brexit date. After the Covid-driven sell-off in 2020, the pound started to regain ground, peaking in May 2021. However, after the high, interest rate differentials have punished the pound as the US central bank, the Federal Reserve, embarked on its aggressive rate-hiking path, driving investors towards the US dollar, at the expense of sterling.

“Since the lows in September of last year following the disastrous mini-budget, sterling has been bouncing back amid expectations that the Fed will shift towards a less aggressive pace of tightening, sending the dollar lower and the pound higher against it.”

Myron Jobson, Senior Personal Finance Analyst, interactive investor, adds: “The past year has been good for UK markets, and show we should be careful not to underestimate the potential of UK PLC. It’s also a good reminder more broadly to have a diversified portfolio, so when some regions are struggling, others might do better. For those who are looking at funds and investment trusts to diversify their portfolio internationally, it’s worth reviewing how global some of those funds actually are as exposure to some jurisdictions within the investment may be large or tiny. 

“If a global fund is too skewed to one region, investors could balance that out by also holding a few specialist regional funds to increase their exposure to certain markets. For UK exposure, we like City of London investment trust, which targets long-term growth in income and capital, principally by investment in equities listed on the London Stock Exchange.”

Most-bought equities on ii: FTSE 100 and FTSE 250 since Brexit – from 31 January 2020-31 January 2023

Most-bought funds, investment trusts, and ETFs on ii combined since Brexit – from 31 January 2020-31 January 2023

Most-bought direct equities overall since Brexit on ii – from 31 January 2020-31 January 2023