Countdown To Brexit: U.K. Earnings Growth In 2021?

The Brexit transition period will end on December 31, 2020. This deadline may have taken a backseat throughout most of the year due to COVID-19. The duopoly of COVID-19 and fears of a no-deal Brexit has caused the FTSE 350 index to fall 14.3% year-to-date, making it one of the worst performers globally.

However, the outlook for 2021 will certainly be somewhat improved irrespective of a Brexit deal, as Britain has begun inoculating its population with a COVID-19 vaccine. Britain was the first country to approve a COVID-19 vaccine and has ordered 40 million doses from Pfizer (PFE).

In the United States, we saw a sharp rotation into value since late October, as hopes of a vaccine would provide some form of normalcy in 2021 and a gradual re-opening of the global economy. We saw a similar picture in the U.K. Since September 30, the FTSE UK Value Index has gained 16.1% compared to a decline of 2.3% in the FTSE UK Growth Index.

Looking at U.K. earnings data for 2021 shows that value, cyclical, and small-cap are expected to outperform on a relative basis.

According to Refinitiv I/B/E/S data, 2021 year-over-year (YoY) earnings growth for the FTSE 350 is expected to be 51.1%. Looking in more detail, cyclical sectors, including Industrials (5,708.3%), Energy (907.0%), and Consumer Discretionary (135.4%), have the highest expected YoY earnings growth rate in 2021.

In contrast, Technology (6.3%) has one of the lowest expected YoY growth rates. The Energy sector would be a source of value, as it is the worst performing sector year-to-date, falling 43.6% while at the same time providing the second highest dividend yield of 6.6%.

We also find that small-cap is expected to outperform large-cap in 2021 as shown in Exhibit 1. The FTSE 250 YoY earnings growth rate is expected to be 94.9% in comparison to a 46.2% YoY growth rate for the FTSE 100. The FTSE 250 growth rate sharply accelerated during the U.K. recession, which lasted from May through July.

Exhibit 1: U.K. 2021 EPS Growth Rates

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