If you’re a reader of the left-leaning media, or even some segments of the right, you’ve no doubt come across the endless forecasts of doom and gloom following the UK’s decision, in June of 2016, to leave the European Union.
Businesses will flee our shores in their droves, the public sector will collapse, and the pound will plummet. Admittedly, some businesses may well emigrate to remain in the single market, the pound did suffer in the immediate aftermath of the result and hasn’t fully recovered since, and, as for the public sector, tighter border controls may indeed stunt the workforce.
But then again, perhaps Brexit will eventually Make Britain Great Again, to channel the Donald’s infectious little mantra; who knows?
In the meantime, if you’re a trader, you may well be most concerned about your currencies, stocks, commodities, indices, and options following the shock result and subsequent (attempted) negotiations to leave the EU and become an independent nation once more.
So, what does Brexit mean for your investments? How will the execution of Article 50 affect your fiscal interests? This article will shed some light on how Brexit – if it ever actually happens – and the interim period which we presently find ourselves in has and will affect your trading account, while providing some advice on what steps you can take to best protect/increase your capital.
So, let’s begin…
Forex traders will be aware of the huge financial implications political decisions can have primarily on a nation’s currency and, by extension, on economies, most succinctly exemplified by the GDP (Gross Domestic Product).
In terms of the immediate effect, a Remain result would have been better for the British pound, without a doubt. Any uncertainty, like the kind caused by the by the electorate’s decision to leave the single market, will always cause a nation’s native currency to suffer. Foreign investors don’t want to take any chances until political stability is restored.
In this respect, Brexit was not an ideal outcome for British forex traders, in the short-term, at least. And although the referendum was very close, Brexit was a decidedly unexpected result; most analysts and commentators, regardless of political leanings, thought the Remainers would clinch it, though only just. And, of course, any deviation from the status quo invariably leads to a weakened national currency.
However, the handy thing about forex trading is that traders, via things like Leveraging, CFDs (Contracts for Difference), and Derivatives (to name but a few available options) can stand to benefit from a currency’s decline. So, those who were sharp enough to bank on Leave and hedge against the pound will have generated a tidy profit from Brexit.
Despite this, there’s a limit to how much can be made from betting against the house, so to speak. The pound fell roughly 17% following the referendum and hasn’t moved much since so it seems the time for hedging/leveraging has been and gone.
Another approach to combat the effects of a looming Brexit is to diversify. Put your money in USD or Euro instead and avoid trading with GBP altogether until a clear plan for leaving the EU emerges. This has been the approach many forex traders have taken and it appears to have paid off.
Following Macron and Merkel’s respective election wins in France and Germany, the Euro has stayed strong and, despite the initial shock of a Trump victory in November of last year, the USD looks pretty good too. Although, Trump has been known to tend toward a weaker dollar in favour of better returns on exports.
In short, Brexit has caused many forex traders to shun the British pound which isn’t great news for British traders. Indeed, according to reports, many British traders have chosen to cease forex trading altogether until things stabilise which will, of course, cause further damage to the market due to inactivity. Hopefully brighter times lie ahead for the British pound and, by extension, British forex traders.
Now, for some good news. The interesting thing about the Brexit result is that, although the result cause the pound to fall rather dramatically, the opposite was true of the national economy and the stock market, by and large. So, despite the falling pound, the UK economy has actually managed to prove itself resilient – bullish, even – in the face of uncertainty.
Indeed, the falling pound has buoyed stock markets, meaning many traders of stocks (particularly in FTSE 100 and FTSE 250 companies) ended up benefitting from Brexit.
In the weeks and months following the Brexit result, the FTSE 100 was repeatedly hitting record highs and has been on a continuous uptrend since the vote last June. The FTSE 250 also bounced back quickly following a knee-jerk drop after Brexit and is now sitting at 20,113.21, at time of writing, up over 3,000 points, since the start of June 2016 (pre-Referendum).
Despite strong performances from the FTSE 100 and FTSE 250, the FTSE local index hasn't performed as well since the Leave result. This index, which only includes businesses that conduct more than 70% of their sales within the UK, is still slightly lower than its pre-Brexit levels.
But, contrary to what most Remainers predicted would happen following a Brexit vote, many businesses and corporations have invested money into British-based entities. Dyson announced plans to increase its UK base ten-fold after purchasing an ex-RAF base to facilitate expansion, and Toyota had planned to invest $240m into its Derbyshire plant (to name just two high-profile examples), though admittedly, in September, doubts emerged over whether this will go ahead.
Brexit was undeniably a shock to the system and the effects such events have on national currencies is almost always negative; this was certainly the case with Brexit. However, as we’ve seen, what’s bad for the currency isn’t necessarily bad for the economy. Yes, a weaker pound restricts the options available to forex traders but for those trading on the stock market, opportunity is rife, with the mining industry performing particularly well, post-Brexit.
Thanks for reading and happy trading!