UK stocks have lagged since the 2016 Brexit referendum, and they haven’t fared any better with Boris Johnson in charge.
The FTSE 100 and local markets-focused FTSE 250 have both fallen around 8% in dollar terms since the outgoing Prime Minister took office in July 2019, with a bleak economic outlook and political unrest since the Brexit, driving investors away from UK assets.
That means a significant underperformance against the S&P 500, which is up 29%, and the MSCI All-Country, which has gained 14%, during Johnson’s tenure. Returns for the Euro Stoxx 50 have been similar to those of the FTSE 100, although the European gauge has largely outperformed the UK since Brexit – a mainstay of Johnson’s political legacy.
The pound, meanwhile, hit a two-year low against the dollar this week and managed only a tentative rebound after Johnson’s resignation. UK stocks rose on Thursday, along with broader markets.
“Changes in the political landscape are normally something investors don’t like, but it was only a matter of time before Johnson fell, so there is now relief that the UK government can finally shut down. the BoJo chapter and move on,” said Ipek Ozkardeskaya, senior analyst at Swissquote.
The poster child of underperformance may be the travel and leisure sector. The FTSE 350 Travel and Leisure index has fallen 42% since Boris Johnson took office while its equivalent in mainland Europe is down 17%. Staff shortages and cost inflation have hit the sector in the UK, with Brexit making it more difficult to hire workers.
The local economy is not doing well either. UK retailers fell around 3.5% in local currency over the roughly three-year period, while global retailers rose 14%. Banks also suffered, with benchmark UK banks falling 16% during Johnson’s tenure and global banks falling 6%.
The prime minister’s resignation is now fueling speculation that a possible shift in fiscal policy could boost the UK stock market.
With the relatively frugal Rishi Sunak no longer in the post of Chancellor of the Exchequer, some are betting Tory leadership candidates could seek support by pledging to lower corporate taxes. It could give domestic equities a much-needed boost, with the business tax due to be raised to 25% from 19% next year.
Meanwhile, sterling weakness and a 75% exposure to foreign earnings, along with a strong commodity mix, have helped the FTSE 100 finally outperform this year. The blue chip index fell less than 3% in 2022, while global peers fell almost 20%.
However, some remain negative about what awaits UK markets amid a cost of living crisis and Bank of England monetary tightening.
There is “no prospect” of a move to a softer Brexit, Evercore ISI analysts Krishna Guha and Peter Williams have said. UK assets will be “dominated by the threat of entrenched stagflationary dynamics and associated pressure on the Bank of England to accelerate the march towards an ongoing economic downturn rather than the political changing of the guard.”