KPMG analysis shows the disparity between performance of UK-focused and internationally-focused companies is almost at record high.
KPMG created two indices to measure the impact of the vote to leave the EU on UK stocks and to understand the relative sentiment towards UK-focused companies and their more international peers since the vote result was announced.
The KPMG Non-UK50 is made up of the UK’s largest listed firms from the FTSE 100 and 250 that derive more than 70% of revenues from abroad.
The KPMG UK50 includes the largest listed firms from the FTSE 100 and 250 that derive more than 70% of their revenues from the UK.
Since the EU referendum in June 2016, the difference between the two indices remains stark: while the KPMG UK50 is 4% below its level prior to the referendum, the KPMG Non-UK50 gained 35% over the same period. The main driver behind the difference in fortunes has been the pound’s exchange rate, which in trade weighted terms is still 11% down since the referendum (see Chart 1 above), increasing the relative value of foreign earnings, therefore benefitting the KPMG Non-UK50 index.
Adjusted to remove the effect of the weaker pound, the performance of the KPMG Non-UK50 has been less stellar over that period. Comparing both KPMG indices in US dollar terms against the FTSE All World index (also in dollars), investors seem to value the prospects of companies listed in the UK less highly, even if the majority of their business is overseas. Since June 2016, the value of the FTSE All World has risen by 25%, versus 20% for KPMG Non-UK50 and -15% for KPMG UK50, all in dollar terms (see Chart 2 below).
We anticipate that the outlook for the next year may be more mixed. While the pound is expected to remain relatively weak, the prospect of an escalating trade war could hurt a significant proportion of our KPMG Non-UK50 constituents. These companies are also potentially more vulnerable to a cliff-edge Brexit, as they tend to have supply chains that are more deeply integrated with the EU.
KPMG analysed the annual accounts of every company in the FTSE 100 and FTSE 250 to calculate the proportion of their revenues originating in and outside the UK. Companies that earned over 70% of their revenues inside Britain were classified as 'UK companies' while those that derived less than 30% were deemed 'non-UK'. These companies were then ranked by market capitalisation and the 50 largest companies included in each index.
The indices were weighted by market cap and calculated using the change in market cap of each company over the period. Both indicies were rebaselined to 100 on the date of the referendum result - 23 June 2016.