Brexit's 4-1/2-year-long shadow over UK markets

By Ritvik Carvalho and Tommy Wilkes

LONDON (Reuters) - Britain and the European Union succeeded on Thursday in agreeing a trade deal to regulate their relationship after Dec. 31, a long-awaited accord that comes 4-1/2 years after Britons voted to leave the bloc.

The impact on UK financial markets of that vote and the years of negotiations and missed deadlines since has been profound -- Britain's currency tumbled to around 20% below long-term fair value, stock prices underperformed almost every other major market and businesses held back on new investment.

The government has put in place the heaviest public borrowing since World War Two, while the Bank of England has engaged an 895 billion-pound bond buying programme to combat the effects of Brexit and the COVID-19 pandemic

Below are five graphics setting out the impact of Brexit on British assets since 2016.

1) STERLING'S WILD RIDE

Sterling has been on a rollercoaster since the June 2016 Brexit vote -- its volatility sometimes resembling that of an emerging market currency.

From trading above $1.50 before the referendum, the pound has had several brief forays below $1.20 - its lowest level since the 1980s. It is now trading around $1.36 - indicating a Brexit discount remains.

Graphic: Rollercoaster ride for the pound https://fingfx.thomsonreuters.com/gfx/mkt/oakvejjympr/brexit%20sterling.PNG

2) STOCK LAGGARDS

British share prices have underperformed nearly all their major peers since 2016.

Despite a stonking central bank-fuelled rebound in global stocks this year, UK domestic-focused company shares are only up around 6.8% in dollar terms from early-2016 levels while the FTSE 100 is 4.5% lower -- that's against an 80% gain for the S&P 500 and an almost 60% rise for world stocks.

Graphic: World stock indexes since Brexit vote https://fingfx.thomsonreuters.com/gfx/buzz/ygdvzjjayvw/Pasted%20image%201608813691856.png

3) WEAK INVESTMENT

New UK business investment flatlined since the 2016 referendum, before falling sharply after the COVID-19 pandemic whacked confidence.

After steady growth in year-on-year business investment before 2016, companies have since cut back on new capital expenditure amid Brexit-related uncertainty.

Year-on-year growth in UK business investment notably fell in late-2018 as companies concerned about the consequences of a no-deal Brexit postponed or axed spending.

Graphic: UK business investment https://fingfx.thomsonreuters.com/gfx/mkt/xklvybbnopg/Pasted%20image%201605854465573.png

4) BREXIT PREMIUM

British companies have had to pay more to borrow from lenders nervous about Brexit, reflected in bank-issued bonds.

For instance, the gap between the yield on Barclays's September 2023 euro-denominated bond and a Deutsche Bank note maturing the same month was as high as 80 basis points in late 2018 when fears of a no-deal Brexit surged.

The gap is currently above 7 basis points, having fallen sharply since a spike in March and April, reflecting investor confidence that London and Brussels would eventually agree a trade deal.

Graphic: Brexit premium https://fingfx.thomsonreuters.com/gfx/mkt/qzjpqddmgvx/brexit%20bond%20premium.PNG

5) WEAKER FINANCES

With a large current account deficit and a debt-to-GDP before the COVID-19 pandemic above 80%, Britain is reliant on international investors' confidence in the UK economy and its markets.

Britain's current account deficit, higher than many peers, has fallen sharply during the pandemic.

But the budget deficit is soaring as the government ups spending to rescue the economy and debt-to-GDP is approaching 100% -- leaving less headroom to spend should the economy need more support after the Brexit transition period ends on Dec. 31.

Graphic: Financial vulnerability https://fingfx.thomsonreuters.com/gfx/mkt/dgkplaadrvb/Pasted%20image%201605850673376.png

(Reporting by Ritvik Carvalho and Tommy Wilkes; Additional reporting by Thyagaraju Adinarayan; Editing by Kirsten Donovan)