The referendum saw 17.4 million vote in favour of leaving the EU against 16.1 million who wanted to remain.
While Article 50 – the EU exit mechanism – was triggered earlier this year giving two-years for a deal to leave the bloc, negotiations have just begun following the snap general election. Negotiations about any future trading agreement are very unlikely to begin until Brexit talks are completed.
Indeed, the implications for the UK’s future relationship with its biggest trading partner was one of the biggest causes of concern among investors with the pound plummeting as soon as the result was known.
Over the past year, sterling is down by 12.64 per cent against the euro and by 13.85 per cent against the US dollar.
Both currencies have strengthened considerably against sterling. However, concerns over the potential surge of support for anti-EU populist politicians in elections on the continent – which failed to materialise – held back the euro.
Meanwhile, the US dollar has been bolstered following the election of Donald Trump as president, as markets anticipate the implementation of pro-growth policies announced during his campaign.
Further uncertainty over negotiations with the EU and the snap general election have provided other headwinds for sterling.
Performance of US dollar & euro vs sterling over 1yr
Source: FE Analytics
“One year on from the Brexit vote and a number of its knock-on effects for the UK economy are still very much in focus,” said Jim Leaviss, head of retail fixed interest at M&G Investments.
“Sterling’s steep decline, for example, was among the immediate headlines after the referendum and the currency’s lower value has persisted to become the main driver of rising inflation.”
In August 2016, the Bank of England’s Monetary Policy Committee announced a further cut to the base rate to 0.25 per cent, among several other measures aimed at stimulating the economy. The central bank also announced plans to purchase up to £10bn in corporate bonds and a £60bn expansion of its quantitative easing (QE) programme.
The expansion of the QE programme – first launched after the global financial crisis – means government debt purchases by the Bank of England have reached £435bn.
“Gilts have done well since the EU referendum, despite initial fears about the inflationary consequences of the drop in the pound,” said John Higgins, chief market strategist at consultancy Capital Economics. “This has reflected the continuation of extremely loose monetary policy and adherence to fiscal austerity.”
Performance of BofAML 1-10 Year UK Gilt index over 1yr
Source: FE Analytics
M&G’s Leaviss added: “For government watchers, the new, weaker Conservative administration may apply less austerity and fiscal tightening in future, but we do not yet expect a significant rise in gilt issuance.
“The goal of reducing the UK’s debt/GDP over the next few years is likely to remain in place, but the ratings agencies are getting nervous and further downgrades to the UK’s credit ratings are increasingly possible.”
Indeed, Higgins said the ongoing outlook for gilts was less bright, “given the prospect of less accommodative monetary policy”.
Neil Williams, chief economist at Hermes Investment Management, said UK no other major economy had net loosened its overall (monetary and fiscal) stance more than the UK in the longer term.
“And, given the subsequent inflation premium, there’s little coincidence that those running the more expansionary policies like the US/UK have generally sustained the weaker currencies,” he said.
“The prospect now for UK policy to stay loose, Brexit negotiations stretching beyond the two years hoped for and US dollar strength as the Fed raises rates and protectionism/repatriation beckons, should leave the pound vulnerable. And, especially if the Bank of England injects more QE to support gilts.”
The Bank of England’s corporate bond purchase scheme was initiated as the central bank considered that it could provide more stimulus than its gilt-buying scheme. While the scheme has not been expanded further, the outlook for the sector remains little changed.
"Corporate bond spreads – the difference in yields between corporate bonds and government bonds - have tightened," said Alix Stewart, fixed income fund manager at Schroders. "The Bank of England’s bond purchase programme brought about a rush to borrow at low rates by companies. However, in a world of abundant central bank liquidity, UK corporate bond yields have not tightened much more than they have in other global markets."
The global search for yield has forced bond prices higher and pushed investors further up the risk scale in search of cheaper sources of income.
This can help explain another recent trend seen in the equities market. As well as the drop-off in currency, one of the other most notable impacts of the referendum on UK assets was seen in the stock markets.
In the immediate aftermath of the result, share prices slid with the blue-chip FTSE 100 index falling by 5.62 per cent and the FTSE 250 index down by 13.65 per cent between 23-27 June.
However, markets rallied after the initial slump as the below chart shows.
Performance of indices over 1yr
Source: FE Analytics
Ketan Patel, fund manager at EdenTree Investment Management, said: “We have been surprised by the resilience of the UK equity market since the EU referendum, despite the ensuing 12-month period ushering in even greater political and economic uncertainty.
“While the sharp fall in sterling has been welcomed by large-cap exporters, long-term investors are increasingly concerned over anaemic wage growth, falling retail sales and rising inflation.”
The FTSE 100 index has outperformed partly due to this flight from small- and mid-cap stocks to larger, internationally-focused companies. It was further buoyed by the election of Trump – as highlighted previously – which provided a tailwind for equities markets around the world. Yet, investors may have been better off sticking with their smaller companies exposure
“Mid- and small-cap companies, which suffered initially, have managed to significantly outperform the FTSE 100 and the FTSE All Share since the end of June 2016,” Patel explained.
He added: “Looking ahead, the onset of Brexit negotiations and greater political uncertainty following the election mean investors are faced with an increasingly linear investment landscape; finding the appropriate balance between domestically-focused companies and overseas exporters will be the key to delivering investment performance in the UK equity market.”
Another area for concern after the referendum was the property sector. With some suggesting that the uncertainty caused by the Brexit process could initially lead to lower levels of foreign direct investment.
Rogier Quirijns, senior vice president and portfolio manager at real assets specialist Cohen & Steers, said the firm was cautious before the Brexit vote and that has since increased.
He said: “You could argue that there will be more deals done, its mostly foreign capital coming into the market because of the low pound.
“My view is that I don’t think weak currency is a buying opportunity. It’s not a strong currency, it is a weak currency [and a] long trend, it’s the wrong reason to buy into these assets from my perspective.”
The IPD UK Industrial index was the strongest performing part of the property market in the 12 months following the referendum, rising by 9.28 percent, compared with low single-digit gains in the retail and office sectors, as the below chart shows.
Performance of property sectors over 1yr
Source: FE Analytics
Quirijns said while pricing in the market has been lower, making acquisitions more attractive, much of the foreign capital flowing into London has come from Asia, which needs to be invested but with not much care for returns.
“[It’s] money that has need to flow out of China into large assets in the UK, my view is that they’re overpaying for assets to get their money out of the country,” he said.
Quirijns said he had sold out of London office exposure before the vote, but since the referendum the likelihood of some banks moving some of their London-based operations to Europe had increased.
One area the manager is more bullish is in the healthcare sectors, where rents offer inflation-linkage, and in warehouses given the resilience of UK consumer appetite and the growing internet retail sector, which has transformed the UK high street.