Since the vote of UK citizens in favor of leaving the EU in June 2016 and the more recent triggering of Article 50 by the UK government, the effects of this historical decision have been played out in the markets. Now is the right time to conduct a thorough analysis of the impact of “Brexit” on UK listed equity.

Our analysis shows that the driving parameter behind listed equity’s reaction to both, the initial referendum and the longer-term economic condition is the revenue exposure of UK domiciled companies to the UK’s economy.  The empirical results indicate that the higher a company’s revenue entanglement with the UK is, the higher was the negative impact of the Brexit vote on firm value. In order to demonstrate this effect, we take a closer look at the relationship between company-level revenue exposures to the UK and stock price performance, as well as the impact of the depreciation of the British Pound (GBP), measured over the course of time since the referendum.

But what does this mean for investors? Portfolios that include companies that are not only domiciled in the UK but additionally generate a substantial portion of their revenue within the UK provide investors with a vehicle that captures the local economic characteristics of the UK to a much better extent than traditional regional benchmarks. STOXX TRU UK indices, available with four different minimum revenue exposure thresholds to the UK of 25%, 50%, 75% and 100% represent such portfolios. These more focused and concise benchmarks allow investors to invest more closely aligned with their convictions: Those who have a positive view on the future economic development of the UK may chose a long position in a STOXX TRU UK index while those with a pessimistic view may use a short position in STOXX TRU UK indices as hedge. We will touch upon these use cases throughout the paper.

 

Read: STOXX TRU UK INDICES – A MORE PRECISE BENCHMARK FOR UK EQUITY INVESTMENTS