Britain’s decision to leave the EU risks damaging the UK economy, especially its vital financial sector. But surprisingly, one of the best-performing European financial stocks since the Brexit referendum in June 2016 is a pillar of the UK’s financial sector: the London Stock Exchange Group (LSEG).
The exchange operator has gained 49% since the referendum in US dollar terms, and about 70% in its local currency, which has been battered by uncertainty about the UK’s future relationship with the EU. The British parliament will vote today on prime minister Theresa May’s Brexit transition plan, a deal tweaked only slightly since it was rejected by a record margin in January.
European financial stock performance since June 23, 2016
| Name | Country | % change local | % change USD |
|---|---|---|---|
| London Stock Exchange Group | UK | 69.5 | 49 |
| Deutsche Boerse | Germany | 39.3 | 37.8 |
| Allianz | Germany | 38.4 | 37 |
| Amundi | France | 35 | 33.6 |
| HSBC | UK | 37.3 | 20.7 |
| Credit Agricole | France | 19.1 | 17.9 |
| AXA | France | 2.2 | 1.2 |
| Legal & General | UK | 13.5 | -0.2 |
| Banco Santander | Spain | -1.8 | -2.8 |
| ING | Netherlands | -4.8 | -5.8 |
| Commerzbank | Germany | -7 | -7.9 |
| Royal Bank of Scotland | UK | 2.6 | -9.8 |
| Credit Suisse | Swiss | -6.1 | -10.8 |
| BNP Paribas | France | -11.2 | -12.1 |
| Lloyds Banking Group | UK | -14.2 | -24.6 |
| Barclays | UK | -15.1 | -25.3 |
| UBS | CH | -21.5 | -25.4 |
| Standard Life Aberdeen | UK | -30.1 | -38.5 |
| Deutsche Bank | Germany | -44.7 | -45.3 |
| Source: FactSet |
The British pound has fallen about 13% against the dollar since the vote in 2016, and has whipsawed amid concerns about UK access to the EU’s single market. Businesses, meanwhile, are also unsettled about changes to immigration policies that could curtail access to top-tier talent.
LSEG has been in the Brexit crossfire since immediately after the referendum. François Hollande, the French president at the time, wasted no time in targeting euro-derivatives clearing, a key part of the exchange group’s business. Deutsche Boerse, a rival exchange in Frankfurt, has also taken aim at the business. An attempted merger between the two exchange companies collapsed in 2017.
Regardless of Brexit uncertainty, LSEG has surged ahead: The company’s revenue increased 8% last year and operating profit rose 15%. The exchange operator has diversified away from making so much of its money from unsteady trading fees, and has shifted toward data feeds (paywall), a more predictable source of revenue. Its index business, linked to the $5 trillion exchange-traded fund market, is among the top providers in the industry. The company’s clearing operations, the subject of much discussion in Brussels and Frankfurt, are still growing and generate more than a third of its profits. LSEG’s stock price may have also been goosed by its prospects as a takeover target.
For now, at least, the political threat against clearing houses—the systemically important institutions designed to keep derivatives defaults from spiraling out of control—has abated. Last month, European regulators gave London-based clearing firms one-year licenses (paywall) to help maintain continuity, no matter whether Brussels and London reach a broader agreements after Brexit. US watchdogs have made similar reassurances. Deutsche Boerse hasn’t yet significantly dented LSEG’s clearing operations.
Not every UK financial firm has fared so well since the referendum. Stock prices for Barclays and Standard Life Aberdeen are deep in the red since the vote. Financial companies have been shifting assets as well as personnel across the English Channel for many months. According to the British government’s own analysis, after 15 years the UK economy (membership) will be smaller under every Brexit scenario.
Yet some of the most dire warnings now appear overblown. The City of London forecasts just 2,000 to 7,000 jobs will leave Britain’s capital, down from an initial estimate of as much as 75,000. (Xavier Rolet, LSEG’s previous chief, once claimed an astounding 232,000 UK jobs were at risk if the EU succeeded in shifting derivatives clearing away from London.) Britain led Europe in fintech investments last year, with startups raising a record $1.7 billion in more than 260 deals, according to Innovate Finance.
Britain’s prospects after leaving the EU—assuming it ever manages to depart—are uncertain and bound to be rocky. But if LSEG’s stock performance is any guide, investors don’t expect Britain’s withdrawal from the bloc to seriously endanger its status as a key finance and trading hub.