Post-Brexit Crisis, What Crisis? The FTSE100 is Roaring Ahead

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Saturday, July 02, 2016 1.54PM / guardian / Photograph: Kin Cheung/AP 

 

It has taken just a week since the shock EU referendum vote for the best FTSE 100 performance in years. What’s going on? Find out here … 

The FTSE 100 has recorded its best weekly performance since December 2011

After an initial slump in the first two trading days following the Brexit vote, the index of Britain’s top 100 companies regained all its losses by Wednesday and is now at its best level since last August.

 

The remarkable rebound has surprised analysts, with Chris Beauchamp, a senior market analyst at the spread betting group IG, saying: “Of all the post-Brexit outcomes discussed across the City over the past few months, ‘buying frenzy’ was not one that was viewed as very likely.”

 

Part of the reason for the recovery is the growing belief that article 50, the mechanism to trigger the UK leaving the EU, will not be triggered for months, whoever ends up with the prime minister’s job. So in some senses it is business as usual for the moment, and the City tends to take a rather short-term view of events.

 

On top of that, the falls in the immediate aftermath of the vote convinced many investors there were bargains to be had.

 

The increases have been seen almost across the board, from safer shares such as utilities which have regular income streams, to mining groups and food and drink businesses.

 

But the pound has been plunging. Surely that’s bad news?

For holidaymakers, yes. But for the FTSE 100 it helps those companies who have large overseas earnings, and these account for about 77% of the index. As the pound falls against the dollar and euro, exporters find their goods are cheaper for overseas customers to buy which boosts their sales and profits.

 

Thursday’s comments from the Bank of England governor, Mark Carney, hinting at further interest rate cuts in the summer, have put more pressure on the pound, and conversely given the FTSE 100 another boost.

 

With interest rates so low, the dividend yield on the FTSE 100 at about 3.5% also makes investing in the market an attractive option rather than relying on keeping cash in the bank.

 

What about gilts? They are a safe bet, surely?

Gilts – UK government bonds – have indeed been rising, but this has meant the yield or dividend payment has been falling. Ten-year gilt yields are below 1% for the first time and the two-year gilt yield is in negative territory, unprecedented for the UK.

 

That effectively means anyone who buys this gilt is paying the UK government for lending it money, even though credit rating agencies downgraded UK debt after the Brexit vote.

 

But generally, everything looks rosy in the circumstances?

Not exactly. The FTSE 100 might appear to have shrugged off Brexit, but in dollar and euro terms it is still underperforming following the fall in sterling.

And not everything is gaining ground. Housebuilders and UK banks have been among the hardest hit on fears of a UK recession and falling consumer spending.

 

What’s happening elsewhere?

It’s bit of a different picture. The FTSE 250 mid-cap index – the next biggest listed UK companies below the leading index – is struggling. It is still 5% below the level it had reached on the day of the referendum.

 

The companies in the mid-cap index are far more exposed to the domestic UK economy than those in the FTSE 100. And so with predictions of possible recession following the Brexit vote – one of the reasons for Carney’s rate cut hints – they are under pressure. As ratings agency Fitch said when it cut the UK’s credit rating from AA+ to AA earlier this week, the decision to leave the EU would have “a negative impact on the UK economy, public finances and political continuity”. It said Britain faced “abrupt slowdown in short-term GDP growth”. 

 

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