Ten years since the Brexit referendum - why has the UK stock market lagged?

In the ten years since the Brexit referendum, it’s been no secret that the UK market has underperformed significantly.

The FTSE 100 is up around 70 per cent in capital terms and the mid-cap FTSE 250 has risen a modest 40 per cent. That compares to around 270 per cent for the S&P 500 in the US, 90 per cent for the Stoxx Euro 600 across Europe, and roughly 350 per cent for Japan’s Nikkei 225 – albeit, in the latter case, the yen’s depreciation has taken some of the shine off those returns for investors here.

Dividends will have helped narrow the gap for the UK market – which is well-known for its comparatively high yields, particularly among larger companies – but they have far from closed it entirely. So what has been behind the FTSE’s tepid returns over the past ten years?

Adrian Murphy is the CEO of Murphy Wealth.

While the lingering effect of Brexit has contributed to sluggish economic growth - and, with that, lower returns from many UK companies - the referendum result is far from the only reason the stock market has lagged behind other major indices in the intervening years. There are a range of contributing factors, all of which have played their part.

A mature index

Over the past decade, the UK’s share of the global market has diminished significantly – it has fallen to 3-4 per cent of total market capitalisation. A big part of that is the fact that the FTSE 100, which is more than 80 per cent of the UK equity market, is largely made up of financials, energy and resource companies, and large, established pharmaceutical businesses. While many are solid companies, broadly speaking they have not delivered the same level of return as the likes of the high-growth potential tech and biotech sectors.

In fact, there have been very few growth companies in the UK at all. Instead, they have either been founded in or gravitated towards the US market, opting to go to initial public offering (IPO) there like chip designer Arm Holdings or switching their primary listing as fintech Wise did earlier this year. Even more traditional companies have followed suit, like equipment rental group Ashtead and building material supplier CRH, seeking a better valuation and access to capital.

People during a national rejoin the EU march in London, marking ten years since the Brexit referendum. Picture: Jeff Moore/PA

More companies in private hands

At the same time, a good number of listed UK companies have been bought out by private investors. Even this week we have seen the likes of EasyJet rebuff an offer, while Intertek was recently the third FTSE 100 this year to fall into private ownership, after the approval of its £10 billion takeover by a consortium led by EQT. The number of companies de-listing has exceeded the number of new listings every year since 2020, according to Financial Conduct Authority data.

There has also been little in the way of new listings coming through. The number of IPOs on the UK’s main market has remained low by historic comparisons in the last decade, with just 11 last year – and that was the strongest 12 months since 2021. Many businesses that, by a lot of measures, would traditionally have reached the point of listing have decided to remain private instead, preferring to avoid the regulatory burden and other pressures that go hand in hand with being on public markets.

Savers staying in cash

If you were completely invested in the UK over the past decade, you would have found yourself substantially lagging behind global indices. That, combined with the perceived risk of investing, has meant too many people across the country choose to stay in cash rather than invest it. Yet, doing so has been counterproductive – the average annualised return from the FTSE 100 alone has been 7.9 per cent over the past decade, even if it has lagged other indices, which is much higher than what would have been achievable through cash over the same period.

But the decision of many savers to remain in cash also has a knock-on effect for the stock market’s performance. Fewer people investing means there is less liquidity and capital availability in markets, suppressing prices. This is why the Chancellor is taking steps to encourage more people to invest through the changes to the annual cash ISA limit and the “Savvy the Squirrel” campaign. While there are some encouraging early signs on that front, with indications more people are looking at investing, there is still a long way to go to change long-held views about money and how it is used.

Diversification is key

Perhaps more than anything, the performance of the UK’s stock market since the referendum underlines why diversification is crucial to long-term investment success. Making sure you have exposure across different markets and sectors means you are not tied to the performance of a single country or asset class. While that might mean you don’t feel the full effect of a specific market or theme doing well, you still benefit. And, just as importantly, it should also mean you are protected if it moves in the opposite direction.

Events like the Brexit referendum are reminders that you cannot predict the future. Taking professional financial advice is one of the best ways you make sure you are set up to weather events like these, with a financial plan and a broad basket of investments put together to weather any short-term shocks to individual companies, markets, or even entire countries.

Adrian Murphy, CEO of Murphy Wealth