On the 10-year anniversary of the Brexit referendum this week, Hetal Mehta, chief economist at UK wealth manager St James’s Place, together with other wealth managers, discussed the economic and investment implications of Brexit, how markets and investors have adapted, and the outlook for the UK economy.

At a media event last week, Hetal Mehta, chief economist at UK wealth manager St James’s Place, highlighted that the UK has lost market shares in Europe 10 years on since Brexit.

“The drop in the UK’s export share into the euro area accelerated post 2016 which has not been seen in imports from the US,” Mehta said at the media event. “The trade balance has also widened and unit labour costs are high.”

“We have been losing competitiveness. Sterling is weaker against the euro. A weaker sterling should have made exports more price competitive,” Mehta continued. “However the flip side was higher import prices contributed to higher inflation in the UK. The UK also used to attract a lot more foreign direct investment (FDI).”

Debate continues on whether far the UK's referendum vote - the largest in the country's history in terms of votes cast - to leave the European Union significantly hit the country's economy or was a temporary challenge as the UK adapted to new and potentially more lucrative trade relationships in the medium term. The UK has, since 2016, signed trade deals including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), involving 12 nations across the Asia-Pacific and the Americas: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. At issue is whether this block of countries - some of which are growing faster than the EU - can fill a gap. The UK's shifting trade relationships affect wealth managers, such as influencing the likely commercial hotspots and places generating the most wealth.

Jon Cunliffe, head of investment office at UK wealth manager JM Finn, said GDP growth slowed materially after the referendum, averaging around 1.5 per cent in the post-vote pre-pandemic years (2017 to 2019) versus 2.2 per cent in 2015.

“The post-pandemic recovery has been modest, with 2023 growth near stagnation at 0.3 per cent,” Cunliffe said in a note. “The Office for Budget Responsibility (OBR) projects a 4 per cent reduction in UK GDP over a 10-year period attributable to Brexit, driven by trade frictions, supply chain disruptions, and persistent inflationary pressures. “Business investment stagnated from 2016 onwards due to uncertainty over the UK's future trading relationship with the EU. Labour has tried to address this issue but with limited success so far. The UK sits near the bottom of G7 peers in terms of post-pandemic GDP growth."

Not severe as feared
However, Mehta noted at the event that the impact of Brexit on the UK has not been as bad as initially feared. “There are advantages to be more aligned to Europe but there are also costs,” she said. “The UK had an edge in financial services. Jobs have fallen in financial services but they were not held back by as much as people feared.”

Mehta also highlighted that UK equities are more attractive compared with the US as they are cheaper. “The UK looks attractive from a valuations perspective. Gilt yields also don’t share any discernible Brexit effects,” she said. Mehta noted that it is difficult to determine exactly how much has been down to Brexit and how was much was a result of other factors. This was echoed by Anna Murdock, head of wealth planning at JM Finn.

“Households are not meaningfully better off in real terms than they were at the time of the Brexit vote. From a wealth planning perspective, the bigger issue is the lack of sustained real growth. When you compare outcomes to where the UK economy might have been on its pre-2016 trajectory, the gap becomes more pronounced,” Murdock said in a note. However, Brexit isn’t the sole driver: global factors such as Covid and energy shocks have also played a significant role. The overall picture for households is one of stagnation rather than meaningful financial progress,” Murdock added.

Are we better or worse off financially?
“On the positive side, asset owners have benefited from a strong rise in housing and equity markets, while access to global investment opportunities and healthy dividend income have supported long-term wealth creation,” Murdock said. “However, this has been offset by weaker areas: real wages have struggled to keep pace with inflation, taxation has risen through fiscal drag, and higher interest rates have increased borrowing costs,” she continued. “Growth has also been more subdued, particularly post-Brexit, weighing on incomes and investment. Overall, while wealth has grown on paper, many households feel worse off as day-to-day affordability has become more stretched.”

Lessons to be learned from Brexit
“Ten years on, Brexit has some salient lessons to teach investors, and indeed politicians,” Isabel Albarran, investment officer at UK wealth and investment manager TrinityBridge, said. “Perhaps the most enduring lesson has been that political uncertainty has a cost. In 2016, the UK constituted around 8 per cent of the global equity index but the past decade has seen that halve,” Albarran continued. “The prolonged period of uncertainty caused by Brexit is a likely contributing factor – overseas investors found they were able to allocate away from the UK, obviating the need to follow the complex political wranglings.”

“This message resonates right now, as Kier Starmer’s premiership comes to an end and a new era of leadership begins. Andy Burnham has, in the past, been critical of “being in hock to the bond market,” sentiments that sent UK bond yields higher,” Albarran said. “Today, UK market dynamics appear calm, but Burnham must remember that political drama risks making the UK less attractive to investors.”

“Should the new executive unveil policies that spook the market, Brexit has another lesson for us to heed – there is always an opportunity,” she added. “In the wake of the Brexit vote, sterling fell around 20 per cent. Ironically, this made the UK index unusually attractive, given the constituents’ high share of overseas earnings. Moments of market turmoil can present valuable investment opportunities,” Albarran said.

Mehta has a higher recession probability for the UK at 40 per cent compared with the US at 30 per cent. She has a neutral view on equity risk, with a bias away from richly valued US assets. In particular, she favours UK equities, Europe ex-UK, Japanese and emerging market equities.