A Leveling of the Playing Field?

Over the last decade, the more powerful decline in the GBP versus the dollar (and especially since Brexit) has had notable effects on stock price performance when compared to peers denominated in EUR.

image

Right up to the Brexit vote on June 23rd, the correlation between stocks included in continental Europe’s Stoxx 50 and those included in the U.K.’s FTSE 100 was fairly weak (at 73%) with the latter generating a near 8% gain while Europe’s Stoxx 50 index had fallen just over 17% for the period.

image

Since the vote–and subsequent plunge in the GBP– two months ago, the correlation jumped to 90% while performance trends continue to show U.K. stocks outpacing their European counterparts nearly two to one (+11% versus +6%).

image

Converting each index’s price performance into USD (for a comparison that comes a bit more easily to the human brain) shows a slightly different picture. Over the longer-term, the correlation between the two indexes exceeds 90% with the STOXX 50 falling more than 25% while the FTSE has declined more than 15%.

image

Looking at performance over the last two months, however, the correlation rises even higher (98%) and we note that the FTSE 100 has gained only very slightly more than it’s European counterpart.

image

Without jumping to too many broad conclusions, there appears to be a chance that Brexit (for this and, of course, a number of other reasons such as policy uncertainty, economic growth prospects, etc) has leveled the playing field, so to speak. Whether or not European equities will continue to benefit from and capitalize on the break remains to be seen.

© GaveKal Capital

Read more commentaries by GaveKal Capital