Investing in the UK Stock Market After Brexit

Jitanchandra Solanki
18 Min read

As the United Kingdom (UK) redraws its future relationship with the European Union (EU), identifying where to invest in the UK stock market after Brexit is high on every investor's to-do list. Hedge fund managers, pension fund managers, everyday investors and traders will remember the huge moves that developed in the UK stock market after the referendum result in June 2016 - and will be keen to try and capitalise on that once more! Learn how you can too, below! ⬇️

In this article, you will learn:

✅ What the Brexit effect on UK stock markets could be and how to identify the right opportunities for your investment portfolios and trading accounts.

✅ How to start investing in the UK stock market after Brexit by having the right tools, products and services at your fingertips to aid in better investing decisions.

✅ A selection of shares that could perform well after Brexit and how to invest in them with commissions of just 0.1% of the trade value and a low minimum transaction value of just £1!

✅ The Brexit impact on financial markets overall and the different asset classes that may be worth focusing on to diversify your portfolio such as the British pound and UK exchange-traded funds (ETFs).

✅ Why a Trade.MT5 account from Admirals UK Ltd could be useful - alongside your Invest.MT5 account - to trade via CFDs (Contracts for Difference) and potentially profit from both rising and falling markets!

✅ And much, much more!

The UK Stock Market After Brexit

Since the UK public voted to leave the EU in the 2016 referendum, UK equities have significantly underperformed every year since. The coronavirus pandemic in early 2020 made matters worse and pushed the UK economy into its worst recession in over 300 years. This fuelled an exodus of institutional money from UK assets into markets offering better yields such as US equities in the technology sector.

However, the depressed asset prices over the past few years have made UK equities one of the cheapest stock markets of any developed nation. This is just one reason investors are keen to understand the effect of Brexit on the stock market in more detail as the long-term opportunities could prove to be quite interesting.

The chart below shows how the FTSE 100 - an index of the largest 100 stocks listed on the London Stock Exchange - has underperformed other major stock market indexes such as the S&P 500, MSCI Emerging Market and Stoxx Europe 600 index since the Brexit vote.

Source: Bloomberg

This highlights one of the most important aspects of trying to capitalise on the Brexit impact on the stock market and UK assets - diversification. While independent investors may have used the multi-year decline in UK stock prices to try and find value stocks, professional traders would have at the same time attempted to hedge their exposure.

There are a variety of ways to hedge your portfolio from falling stock prices. One way for independent investors is to use Contracts for Difference which allows the trader or investor to potentially profit from falling markets, as well as rising markets. The theory is that by 'shorting' the stock market index the profits from this could offset the declines in a stock portfolio. You can learn more about this in the ' What is Short Selling?' article.

Did you know you can view real-time prices of the FTSE 100 through the MetaTrader 5 trading platform provided by Admirals? This allows you to see what's happening in the big picture, trade directly from the chart using a live or demo trading account and access a range of premium trading tools. Click the banner below to start your FREE download!

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The Brexit Effect on UK Stock Market

Many investors were caught off guard after the Brexit referendum as the UK stock market surged higher after the vote, as shown in the yellow box on the monthly price chart of the FTSE 100 index below:

Source: Admirals MetaTrader 5, FTSE 100, Monthly - Data range: 1 Aug 2005 to 15 Oct 2020, performed on 15 Oct 2020 at 8:09 am BST. Please note: Past performance is not a reliable indicator of future results.

You can learn more about trading the FTSE 100 in the ' How to Trade the FTSE 100' article. For now, to better understand this phenomenon and the potential Brexit stock market impact in the future, it is important to first know the uniqueness of how the UK stock market is constructed.

Many of the firms listed in the FTSE 100 make a large portion of their profits in US dollars. Therefore, the movement of the British pound has a significant impact on the UK stock market. In the chart below by the asset management company Schroders, the inner circle shows that 97% of companies in the FTSE 100 have head offices in the UK. But, only 28.9% of the total revenue generated comes from the UK.

Source: Schroders

So what does this mean? Imagine a scenario where the GBPUSD exchange rate was trading at 1.5000. This means that every $1,000 in revenue would be £666 (1,000 / 1.5). If the British pound weakened and the exchange rate fell to 1.2000 that means that the same $1,000 of revenue would now be worth £833 (1,000 / 1.2).

While a falling sterling may benefit some companies in the FTSE 100 it could also hurt others. The company's business model makes a huge difference on whether it will be impacted by Brexit or not. In answering the popular question of 'How will no-deal Brexit affect stock markets?' or 'What will happen to the stock market after Brexit?' the key really lies in what is happening with the British pound! Typically:

▶️ A country's currency will rise if investors are positive on the economic prospects of it. This is because during an economic boom central banks increase interest rates to make sure inflation does not get too high. Therefore, large asset managers will buy bonds in the currency of that country to gain access to these higher interest rates.

▶️ Of course, if a country's economic prospects are not that good or uncertain then investors will move money out of that country into another country in search of higher yields. This results in a fall in the country's currency which is what happened before, during and after the Brexit referendum.

This phenomenon does open up interesting opportunities to capitalise on, as discussed in the next section. However, to be able to take advantage of any opportunities that do arise it is important to have access to the right trading tools and products. Being able to access multiple markets can be useful when navigating the Brexit impact on financial markets.

Did you know that with a live trading account from Admirals you can:

✔️ Access a wide variety of asset classes such as CFDs on foreign exchange markets, stocks, commodities, indices, bonds and more?

✔️ Manage an investing account for real stocks and shares from 15 of the largest stock exchanges in the world from just one platform!

✔️ Receive FREE access to premium trading tools from Trading Central and market news and analysis from the Admirals content team?

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Brexit Stock Market Ideas

As already discussed, the movement of sterling can have a big impact on the FTSE 100 stock market index and price direction of individual shares. Being prepared for the impact of Brexit means having ideas based on which companies are likely to perform well with a weak sterling (no-deal Brexit) or strong sterling (Brexit deal).

Below are just a few ideas to get started with. Of course, further analysis and research is always recommended to suit your own individual trading and investing goals. Let's start with which stocks could benefit from a weak pound before looking at which stocks could benefit from a stronger pound.

#1 Diageo (DGE)

Diageo PLC is a multinational beverage company that is headquartered in London but operates in more than 180 countries. The company is the producer of many well-known brands such as Johnnie Walker, Smirnoff, Baileys, Guinness and many others. As a global company, it generates most of its revenues and earnings internationally. This means that it is likely to benefit from a weak pound which could be the result of a no-deal Brexit situation.

Source: Admirals MetaTrader 5, #DGE, Monthly - Data range: 1 Aug 2005 to 15 Oct 2020, performed on 15 Oct 2020 at 9:09 am BST. Please note: Past performance is not a reliable indicator of future results.

Above is the long-term, monthly price chart of Diageo's share price. It is clear to see the long-term trend that has developed over the years. Declines have emerged, however, with the most significant from October 2019 which was - rather interestingly - the beginning of a four-month rally higher in the GBPUSD exchange rate.

The chart above also shows price being supported by its long-term 100-exponential moving average (the green wavy line), as well as a trend line from the lows of 2009, 2020, 2015, 2016 and early 2020. While the sell-off from the impact of Covid-19 has brought the stock lower, it may attract longer-term investors looking for high-quality companies and not to mention dividend investors as the company has increased its annual dividend 22 times in a row.

Did you know that you can build a portfolio of dividend-paying stocks with the Invest.MT5 account provided by Admirals? This means you could potentially build a passive income stream! Learn more and open account by clicking on the banner below:

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Other UK companies that generate large portions of their revenue internationally and could, therefore, benefit from a lower British pound include:

▶️ WPP (WPP) - Considered the world's largest advertising company, much of their revenue is made from its different agencies all around the world. Earnings after the Brexit referendum did benefit from the weaker sterling.

▶️ British American Tobacco (BATS) - Considered the world's most international tobacco group, operating in more countries than any other, much of their revenue comes from international markets. In fact, around 38% of its revenue comes from the US with only a fraction coming from the UK market, making its profit and loss highly dependent on the value of the pound.

#2 Berkeley Group (BKG)

The Berkeley Group is a British property company. Real estate companies may not be the most obvious choice for capitalising on the impact of Brexit which is exactly why it is on investors' watchlist. The value of the British pound won't have as much of an effect on this domestic business.

Some economists say that a no-deal Brexit could cause job losses which would stop people from buying new homes. However, the UK government has already committed to reducing planning laws to build more homes to stimulate the economy. This was promised during the election campaign but came to the forefront as a way to help the UK economy out of the devastating impact of the coronavirus.

Source: Admirals MetaTrader 5, #BKG, Monthly - Data range: 1 Aug 2005 to 15 Oct 2020, performed on 15 Oct 2020 at 10:09 am BST. Please note: Past performance is not a reliable indicator of future results.

In the long-term, monthly price chart above it shows that Berkeley Group's share price has been rising for some time, albeit in a volatile manner. However, the price has most recently bounced from long-term support zones from the 50-period and 100-period exponential moving averages and the long-term trend line.

Other UK companies that are more domestically focused and may not have a large impact from moves in the sterling, include:

▶️Lloyds (LLOY) - Lloyd's is one of the UK's largest banks and focuses almost exclusively in the UK market. But while there may be no large impact from moves in sterling, any banking stock is a play on the economy. The impact of the coronavirus has wreaked havoc on global economies but is, nonetheless, an interesting stock to watch.

▶️ FTSE 250 Index ETF - The FTSE 250 index comprises the 101st to 350th largest companies listed on the London Stock Exchange. These are primarily companies that are more domestically focused. With Admirals you can invest into a range of different FTSE 250 ETFs, such as: iShares FTSE 250 ETF (MIDDL)Vanguard FTSE 250 ETF (VMID).

In fact, with the Admirals Invest.MT5 account you can invest in stocks and ETFs from the 15 of the largest stock exchanges in the world! You can open an account with only a €1 minimum deposit and enjoy free access to real-time prices and access low commissions and low minimum transaction fees.

To get started, click on the banner below:

#3 British Pound

One alternative play on Brexit is the British pound. The currency market offers certain unique features that could be interesting for many investors. This includes:

✔️ Accessing global markets by buying and selling the British pound against other currencies that could have strong directional outlooks. For example, if a trader wanted to buy the British pound they would look to sell a very weak currency thereby capitalising on two events which may result in a strong directional trend.

✔️ The ability to buy and sell 24 hours a day, 5 days a week meaning you can react to news and fundamentals quickly. This can be particularly useful in volatile markets which can move very quickly. Traditionally stock investors would have to wait for the market to open to transact by which time price may have already moved.

You can learn more about trading the British pound in the ' How to Trade GBP/USD' article. While not perfect, there has been a correlation between the FTSE 100 rising while sterling is falling. This was most pronounced after the Brexit referendum, as the chart below shows:

Source: Schroders

The British pound is one of the most undervalued G7 currencies in the world. After the Brexit referendum, the GBPUSD exchange rate fell to a 30-year low. Since then price has been volatile with no clear bias in the long-term. But, more certainty around the outcome and impact of Brexit could bring larger fund managers back to the currency, making it a pair to watch in the long-term.

Below is a long-term, monthly price chart of the GBPUSD exchange rate showing the long-term decline of sterling relative to the US dollar.

Source: Admirals MetaTrader 5, GBPUSD, Monthly - Data range: 1 May 1993 to 15 Oct 2020, performed on 15 Oct 2020 at 11:09 am BST. Please note: Past performance is not a reliable indicator of future results.

You can learn more about how to trade the GBP from a professional trader in the following 45-minute video below which will cover:

✔️ What makes the GBP special for traders?
✔️ What does a trader need to be aware of when trading GBP?
✔️ How can we trade GBP most effectively?

How to Invest for Brexit

Once you've identified the right financial instruments for your portfolio, you can view price charts and trade directly from the MetaTrader 5 trading platform provided by Admirals using the following steps ⬇️:

  1. Begin by opening your trading platform. Alternatively, start your free download here.
  2. Open the Market Watch window from the View tab from the top menu.
  3. This window will open on the left. Click the last line which has a plus button and text saying 'click to add' and type in the instrument you wish to trade on. A selection of different instruments will appear. Simply press enter on the one you want to add it to the list.
  4. To open a chart of this instrument, simply drag the symbol onto the chart.
  5. To open a trading ticket on the chart right-click, select Trading and then New Order. A trading ticket will open up for you to input your own entry, stop loss and take profit levels as well as your position size.

A screenshot showing the MetaTrader 5 trading platform provided by Admirals with a trading ticket open on the chart.

Did you know that you can also supercharge your MetaTrader 5 trading platform with the exclusive Admirals Supreme Edition plugin? This allows you to access advanced trading tools including the Technical Insight Lookup indicator which provides actionable trading ideas on thousands of different financial instruments!

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Why trade Brexit with Admirals?

✅ Trade and invest with a well-established company authorised and regulated by the Financial Conduct Authority (FCA).
✅ Benefit from a negative balance protection policy which can protect you from adverse movements in the market.
✅ Trade from the popular online trading platform MetaTrader for PC, Mac, Web, Android and iOS operating systems.
✅ Supercharge your trading platform completely FREE by upgrading to the Supreme Edition for actionable trading ideas on thousands of different stocks and shares.
✅ Open an Invest.MT5 investing account to buy stocks, shares and ETFs from 15 of the largest stock exchanges in the world.
✅ Open a Trade.MT5 trading account to trade via CFDs, allowing you to go long and short a market and potentially profit from rising and falling markets.
✅ Manage all of your accounts, deposits and withdrawals, while accessing live customer support, all from one place in the Admirals Dashboard online!

Did you know that you can test these services and your own trading ideas and theories on the UK stock market after Brexit by opening a FREE demo trading account? This means you can trade in a virtual trading environment until you are ready for a live account!

Test your ideas and theories today by clicking on the banner below:

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About Admirals

Admirals is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or recommendation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

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