Analyzing BREXIT's Impact on Share Markets: UK and Europe Comparison

This report examines the significant global event of the United Kingdom's exit from the European Union (BREXIT) and its subsequent impact on the share markets of the UK and Europe. The study analyzes the pre- and post-BREXIT periods, comparing trade conditions, economic situations, and future trade strategies to assess their influence on the share markets and GDP of both regions. The report investigates the correlation between the BREXIT announcement, share market performance, and GDP, using research methods to highlight significant trends. Key findings include the impact on GDP, market volatility, and the long-term economic implications for both the UK and Europe. The report reviews relevant literature, including the concept of BREXIT, its influence, and the correlation between BREXIT announcement, GDP, and the share market. The research includes the aim to investigate and analyze the impact of BREXIT on the share markets of the United Kingdom and Europe, as well as the correlation between GDP of both countries and the influence on the share market, before and after the announcement.

“The impact on the share market of the United Kingdom and
Europe before and after the BREXIT announcement”
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Abstract
The exit of the United Kingdom from the shadow of the European Union is one of the important
events recognized globally. Therefore, it is quite obvious that the United Kingdom will face
many hardships to survive with the advancing world that exhibits vigorous competition in the
market. The paper explains, in brief, the effect of the share market in the pre-Brexit and the post-
Brexit period along with evaluating the same with regard to other financial factors. The
evaluation and assessment are done by comparing the trade conditions, economic, condition and
future strategies of trade that can increase the net income in the long run. The real experience of
the United Kingdom’s performance is assessed in this study including the post- and pre-Brexit
years.
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Table of Contents
Introduction......................................................................................................................................3
Background of the research.............................................................................................................3
Aim and objectives of the research..................................................................................................4
Rationale..........................................................................................................................................5
Literature review..............................................................................................................................6
Concept of BREXIT........................................................................................................................6
Influence of BREXIT on the United Kingdom and Europe............................................................6
Concept of GDP and share market as well as comparison of GDP of the United Kingdom and
Europe..............................................................................................................................................7
Impact of BREXIT announcement on the GDP of both countries as well as their share markets. .7
Correlation between BREXIT announcement, performance of the share market and GDP of the
United Kingdom and Europe...........................................................................................................9
Research Methods..........................................................................................................................10
Patterns of data, highlighting significant trends in Share market and GDP..................................11
References......................................................................................................................................13
Appendices....................................................................................................................................15
Appendix 1: Details of the articles reviewed.................................................................................15
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Introduction
BREXIT is an acronym for British Exit, which represents the exit of the UK from the European
Union; this was a decision which affected the operations of the global market adversely, leading
to a historic reduction in the exchange rate of the British pound in comparison to US Dollars,
which had not been experienced even once in the last three decades. This study aims to assess the
impact of the Brexit announcement on the share market and economy of the UK, in comparison
to Europe as well as its impact on the GDP of the two countries.
Background of the research
The Brexit announcement refers to the removal of the United Kingdom from the ambit of the
European Union. On the 26th of June in 2016 through a ballot, it was evaluated that 51.9 percent
votes supported withdrawal from the European Union; hence the government of the United
Kingdom cited Article 50 of the Treaty on the European Union. The removal of the United
Kingdom from the European Union surely influences the share market and affects the GDP of
the country (Bashir, et al., 2019). The United Kingdom was granted the liberty to withdraw from
the before mentioned Union on March 29, 2019, but due to the three times rejection of the
agreement between the United Kingdom and European Union by the MPs of the United
Kingdom, the date is now extended to 31st October 2019. However, the United Kingdom may
leave the union before, if both the parties to this agree. The Brexit deal consists of two parts
namely, a withdrawal agreement of 585-pages and statements on future relation of 26-pages
(Bacon & Cannon, 2018).
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Aim and objectives of the research
The aim of the research is to investigate and analyze the impact of BREXIT on the share
markets of the United Kingdom and Europe, as well as the correlation between GDP of both
countries and the influence on the share market, before and after the announcement
Objectives of the research
 To understand the concept of BREXIT
 To explore the ways in which BREXIT announcement influenced the United Kingdom
and Europe
 To investigate the correlation between BREXIT announcement, GDP of both countries
and impact on the share market of the United Kingdom and Europe
 To analyze the impact of BREXIT on the change of GDP of both the countries, before
and after its announcement
Research questions
 What is BREXIT?
 What are the ways in which BREXIT announcement influenced the United Kingdom and
Europe?
 What is the correlation between BREXIT announcement, GDP of both countries and
impact on the share market of the United Kingdom and Europe?
 What has been the impact of BREXIT on the change of GDP of both the countries, before
and after its announcement?
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Rationale
After evaluating and consulting various journals and articles this has been observed that the
Brexit announcement will have a significant impact on the economic as well as other conditions
as well. This has been evident that the British economy, especially the share market, will observe
some hardships which will, in turn, affect the GDP of the concerned country. The future growth
of the United Kingdom depends on the trading relationship of the United Kingdom with the
European Union and the rest of the countries of the world (Cannon & Bacon 2018). Another
important factor that may influence the United Kingdom’s economy is the impact of inward
foreign direct investment (FDI). As the United Kingdom has not been open to inward investors
for almost 40 years, this arrangement may appear to be a little rigid for the market of the United
Kingdom. The issue that the United Kingdom possesses a deficit in long-running trade has been
much debated and this has been found that the United Kingdom is preparing to balance the same
with Foreign Direct Investments (Auld & Linton, 2019). The impact on the share market and the
investors along with the business all over the United Kingdom has been assessed and the
outcomes suggest that the economic order should be the main concern after the separation. This
research shall be focusing on the impact and highlighting the loopholes and the weakness of the
new United Kingdom in comparison with the old one; and also suggesting the possible way out
to minimize the time of recovery (Alvarez-Diez, Baixauli-Soler & Belda-Ruiz, 2019).
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Literature review
Concept of BREXIT
The term Brexit simply refers to exit of the United Kingdom. The possibility of the United
Kingdom would withdraw itself from the union of Europe through Brexit is the main concern of
the businesses in the United Kingdom. A new and fresh political and economic relation is
expected to b established between the European Union and the United Kingdom. As opined by
Ziv, et al., (2018) to understand the implications of the European Union and globalization, this is
to be understood first, that why did the citizens of the United Kingdom vote to leave. The
breakout from the European Union and the future uncertainty is the prime concern of the United
Kingdom as it may prove to be damaging and unfavourable for the business within the United
Kingdom. The trade costs among the other European countries are expected to be much higher
and this will lower the trade and adversely lower the average income of the United Kingdom. It
would be better for the United Kingdom if it opts for ‘hard Brexit’ which focuses on trading
under the World Trade Organization rules and excludes the concept of trading in a single market
rather than trading in the single market as suggested by the ‘soft Brexit’.
Influence of BREXIT on the United Kingdom and Europe
With the United Kingdom’s withdrawal for the European Union, the United Kingdom will no
longer be able to a part of the European Union’s supranational political institutions and this may
result in increasing the barriers of trade and commerce, exchange services and people. In the
views of Alkhatib & Harasheh, (2018), the United Kingdom operates an economy that is small
and open along with an influence in services which depends largely on trading with the European
Union. Due to the removal of the United Kingdom, the policy of exchanging people will also
change within Europe and the British habitats will be required to abide by the concerned policy
and law. According to the Brexit deal, with the removal of the United Kingdom from the
European Union a 310-mile border Northern Ireland and Ireland is expected to become the land
border within the United Kingdom and the European Union. Both the United Kingdom and the
European Union decided to introduce a “backstop” which a type of safety net that ensures there
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rests no hardships whatever may be the result of the future trade in between the Eu and the
United Kingdom. According to Leruth, Gänzle & Trondal (2019), Brexit may bring in new
benefits like better regulation, more trade and commerce among non-European Union nations
and evidently lower immigration; and this in comparison to their losses is much little.
Concept of GDP and share market as well as comparison of GDP of the United Kingdom
and Europe
The measurement of the all-over economic activity of a nation in a country is known as Gross
Domestic Product (GDP). The Gross Domestic Product as assessed in 2017 value 2622.43 billion
US dollar. 4.23 percent of the economy of the world is occupied by the United Kingdom’s GDP
value. The mean GDP value of the United Kingdom’s ranging from 1960 to 2017 is 1162.89
billion US dollar, with the highest as 3074.36 billion US dollar in 2017 and the lowest being
72.33 billion US dollar in1960. The annual growth rate of GDP of the concerned country is
1.8%. The European Union exhibits a GDP value worth 17277.70 billion US dollars as evaluated
in 2017, with an average of 7421.83 billion US dollar ranging from 1960 to 2017. European
Union’s GDP occupies 27.87 percent of the world economy. It reached the highest GDP value in
2008 and its 19137.01 billion US dollar; again, the lowest GDP recorded in the year 1960 that
amounts to 359.03 billion US dollar.
The basic and main stock exchange in the United Kingdom is the London Stock Exchange (LSE)
which is also the largest in the whole of Europe. The cost per share when is put to sale is $38.20
in the United Kingdom. According to Howarth & Quaglia, (2018), the net value of the stock
market amounts to 68.75 percent contribution to the GDP of the United Kingdom.
Impact of BREXIT announcement on the GDP of both countries as well as their share
markets
The biggest estimation of loss of GDP is expected with the United Kingdom’s leaving the single
market and focusing on the WTO rules. The government of the United Kingdom’s estimation of
the GDP of the country is given in Table 1.
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Table 1. Estimates of the Short-term Impact of Brexit
(Source: Ulster.ac.uk, 2019)
According to Lavery, Quaglia, Dannreuther, (2019), the estimation made by United Kingdom
government further adds that, the Gross Domestic Product will nearly decrease by 3.6 percent in
coming 2 years. The financial market is expected to immediately fall by 10 percent to 14 percent
in regard to the exchange rate. The business investments may be damaged due to the uncertainty
of the market with the United Kingdom. The spending of the customers is thought to be reduced
as higher inflation caused by an even lower rate of exchange which again leads to a reduction of
real wages. In the views of Hantzsche, Kara & Young, (2019), the mean wages and the capital
remuneration in the United Kingdom are expected to face depreciation by around -2.83 percent
and -3.34 percent when using ‘hard Brexit’ while the depreciation is around -1.26 percent and -
1.59 percent when the United Kingdom opts ‘soft Brexit’. The capital remuneration and wage
reduction appear to be seven times bigger within the United Kingdom in comparison with the
European Union. However, declination in the prices heads to the reduction of the consumer price
index (CPI) in European Union; but the condition in the United Kingdom is not similar, as
greater trade limitations applied to the trade of the concerned nation shows positive outcomes
with an increase in price.
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Correlation between BREXIT announcement, performance of the share market and GDP
of the United Kingdom and Europe
In January 2017, the Prime Minister of the United Kingdom, Theresa May clearly stated that the
United Kingdom would refrain from further involvement in the single market and opt for a free
trade agreement within the European Union that will help them both to further develop the
trading as well as other social relations with each other. The open trade of the United Kingdom
as measured by the sum of its import and export when related to GDP is 0.57 which is greater
than that of the USA. As much as 44 percent of the United Kingdom’s exports and around 53
percent of imports of the concerned country is influenced by European Union. The UK and EU
trade alignment is less significant to the EU and more significant to the United Kingdom.
According to Gudgin, et al., (2018), “Regulatory divergence grows over time increasing the cost
of trade, impacting on volumes and the UK place in supply chains” and this is quite evident that
the GDP largely depends on the trade which is the main focus of the concerned country. In
addition to this, the economic condition of Europe is vastly excessive and the GDP per capita
growth in the European Union has outstripped that of the United States and Japan since 1991.
(For details of the articles reviewed in this section, please refer to appendix 1.)
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Research Methods
Type of data to be collected for the research
The successful conduction of the research would be with the help of qualitative method of
secondary data collection method. The research on the basis of share market price and GDP rate
of United Kingdom; the information has been integrated from business annual reports,
magazines and newsletter articles. These sources are reliable for acquiring appropriate
information to analyze the share market price of United Kingdom and pre-Brexit and post-Brexit
situations in Europe. This can be useful for making the study more authentic, as authenticity,
validity and reliability are the most significant factor for conducting a research. The major
advantages of the quantitative secondary data collection method are that, it is the most suitable
data for completion of any research and thus, are readily available and are easy to analyze and
assess (Kumar, 2019). The articles and journals are also effective as they cover information from
a large time span. This can let the researcher to acquire information of large time span. This also
makes comparative study easier. However, it can also be determined that there are certain
disadvantages that there are certain loopholes that might not let the researcher acquire
appropriate information regarding the topic. Hence, the loophole might remain as a barrier to
effective research.
Time Series Model and the way it will be implemented in this study
Time Series Model can be considered as the series of data point through which the sequence of
actions is analyzed in respect to certain time period. This is also useful for deciphering the
underlying structure and functions of the researcher; this is also useful for understanding the
observation of the researcher. This respective model also contributes towards understanding the
mechanism of time that has been utilized for completion of the research. This model is
encompassed of four different components. The components are Trend, Seasonality, Cyclicity
and Irregularity (Alavi et al., 2018). This model can be effective in descriptive analysis and is
used for forecasting. The researcher can also be completed on the basis of explanative analysis
and is also used for analyzing future assumptions. The behaviour of the phenomenon is also
studied and effectively compares the current trends of the study and used for forecasting sales,
profit and more (Hollway, 2018).
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Figure: Time Series Plot
(Source: Alavi et al., 2018)
Patterns of data, highlighting significant trends in Share market and GDP
There has been a post-war shift in the economic condition of United Kingdom, and this has
shifted economic power to the manufacturers of the country and there also has been a roughly in
line with other major economies that has resulted in serious decline in the manufacturing services
of United Kingdom. Financial services have been the major concern of United Kingdom and
thus, this sector has faced a rapid growth between the years 2006 to 2009 (Mikhail et al., 2018).
The GDP growth of the country has faced several crises and the growth of the economy has
remained sluggish. There was an increase of 9.7% in the economy as compared to the pre-
downturn peak. It has also been observed that the economic condition of United Kingdom has
faced a severe downfall in the year 2018 and the retardation is expected to be recovered in this
year. This has also resulted in the downfall of the share market prices in United Kingdom.
However, Brexit has also caused a great harm to the United Kingdom economy and has also
affected the European Union after the United Kingdom's withdrawal.
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Figure: United Kingdom GDP Growth
(Source: Mikhail et al., 2018)
The reason for the trends and anomalies (if any)
There was a jump in the French pharma giant Sanofi’s stocks, and this added a positive mood for
more expectations by the central banks that are waiting for stir growth. There was also a sharp
rise in the Shell and BP’s shares, and this has helped Britain’s main stock index to gain fifth
consecutive session (Rix et al., 2019). This has also contributed towards softening the US-
Mexico trade tensions. However, on the other hand, Euro zone shares were found to be
underperformed, hit by a stronger euro after the European Central Bank.
The proposed methods for analyzing the data
With the help of the Time Series Model, the plotting can be used for performing descriptive
analysis that can be useful for making assumptions for the future. This can help people to
understand the situation of the share market and hence, make investments accordingly (Sun &
Lipsitz, 2018). Brexit has also affected the European Union in terms of their social and economic
aspects, post-Brexit, the relationship of United Kingdom and European Union has been observed
to be clear. Both the countries face benefits and disadvantages mutually in terms of economy.
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References
Alkhatib, A., & Harasheh, M. (2018). Performance of Exchange Traded Funds during the Brexit
referendum: An event study. International Journal of Financial Studies, 6(3), 64.
Alvarez-Diez, S., Baixauli-Soler, J. S., & Belda-Ruiz, M. (2019). Co-movements between the
British pound, the euro and the Japanese yen: the Brexit impact. Journal of Economic
Studies, 46(2), 467-481.
Auld, T., & Linton, O. (2019). The behaviour of betting and currency markets on the night of the
EU referendum. International Journal of Forecasting, 35(1), 371-389.
Bacon, F. W., & Cannon, C. C. (2018). Brexit Announcement: A Test of Market
Efficiency. Journal of Applied Business and Economics, 20(8).
Bashir, U., Zebende, G. F., Yu, Y., Hussain, M., Ali, A., & Abbas, G. (2019). Differential
market reactions to pre and post Brexit referendum. Physica A: Statistical Mechanics and
its Applications, 515, 151-158.
Cannon, C. C., & Bacon, F. W. (2018). Brexit announcement: testing market
efficiency. Copyright 2018 by Institute for Global Business Research, Nashville, TN,
USA, 27.
Gudgin, G., Coutts, K., Gibson, N., & Buchanan, J. (2018). The macro-economic impact of
Brexit: using the CBR macro-economic model of the UK economy (UKMOD). Journal
of Self-Governance and Management Economics, 6(2), 7-49.
Hantzsche, A., Kara, A., & Young, G. (2019). The economic effects of the UK government's
proposed Brexit deal. The World Economy, 42(1), 5-20.
Howarth, D., & Quaglia, L. (2018). Brexit and the battle for financial services. Journal of
European public policy, 25(8), 1118-1136.
Lavery, S., Quaglia, L., & Dannreuther, C. (2019). The political economy of Brexit and the
future of British capitalism first symposium. New political economy, 24(2), 252-257.
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Leruth, B., Gänzle, S., & Trondal, J. (2019). Exploring Differentiated Disintegration in a Post‐
Brexit European Union. JCMS: Journal of Common Market Studies.
Ulster.ac.uk. (2019). Retrieved 7 June 2019, from
https://www.ulster.ac.uk/__data/assets/pdf_file/0017/181502/CBR-Brexit-Impact.pdf
Ziv, G., Watson, E., Young, D., Howard, D. C., Larcom, S. T., & Tanentzap, A. J. (2018). The
potential impact of Brexit on the energy, water and food nexus in the UK: A fuzzy
cognitive mapping approach. Applied Energy, 210, 487-498.
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Appendices
Appendix 1: Details of the articles reviewed
Article title Journal
name
Purpose of
the article
Methodology Research
outcomes
Remarks
The Political
Economy of
Brexit and the
Future of
British
Capitalism First
Symposium
New political
Journal
In order to
analyse the
challenges
faced by UK
and Europe
due to Brexit
Quantitative
secondary
data
collection
Challenges
generated by
Brexit
The article
has been
quite
assistive
The potential
impact of Brexit
on the energy,
water and food
nexus in the
UK: A fuzzy
cognitive
mapping
approach
ScienceDirect To analyse
the potential
impact of
Brexit on
energy,
water and
food aspects
in UK
Primary data
collection
Potential
impact of
Brexit
Appropriate
information
was
acquired
Exploring
Differentiated
Disintegration
in a Post‐Brexit
European Union
Wiley Online
Library
Aftermath
British
referendum
in relation to
UK leaving
Europe
Secondary
data
collection
Differentiated
disintegration
in Post-Brexit
European
Union
Assistive
The economic The world Economic Primary data Various The article
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effects of the
UK
government's
proposed Brexit
deal
economy aspects of
government
of UK in
respect to
Brexit
collection propositions
adopted by
UK
government
has certain
loopholes
that
restricted
appropriate
information
The macro-
economic
impact of
brexit: using the
cbr
macroeconomic
model of the uk
economy
(ukmod)
Centre for
Business
Research,
University of
Cambridge,
Working
Paper No. 483
Using the
CBR model
for
investigating
certain
possible
future
outcome of
the Brexit
Secondary
data
collection
Assessing the
assumptions
that has been
forecast on
the basis of
the selected
model
Assistive
Brexit
Announcement:
A test of market
efficiency
Journal of
Applied
Business and
Economics
Testing the
marketing
efficiency in
response to
Brexit effect
Primary data
collection
Market
analysis and
pre-brexit and
post-brexit
Helpful
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