A brief look at the FTSE 100 would suggest that not much has been happening since the UK voted to leave the European Union (EU). In fact, the FTSE 100 was at its highest level since August 2015 on Friday 1 July.
The initial reaction in financial markets to the referendum result went as expected. As the result was confirmed, the FTSE 100 fell around 8%. The pound was down around 12% against the US dollar and European stock markets fell as uncertainty on both sides of the English Channel spooked investors.
Which sectors suffered?
House builders and banks were the main sectors to bear the brunt of the sell-off. These are both sensitive to the strength of the UK economy. Airlines also suffered as a weaker pound meant it would be more expensive to go overseas and fuel costs could rise.
Which sectors benefited?
Defensive sectors rallied as investors looked for companies that were likely to benefit from the fallout. Gold led the way after the result, followed by consumer goods, tobacco and pharmaceuticals. By and large these are international industries which are not as sensitive to the UK economy.
What’s the outlook for the UK economy?
Economists have downgraded UK growth forecasts with some predicting a recession. While we think the UK will narrowly avoid a recession, growth for 2017 is likely to fall to 0.4% from the 1.9% predicted before the referendum.
The timeline so far:
Friday 24 June
By the end of ‘Brexit Day’ the FTSE 100 had staged something of a recovery, ending 3% down on the day but still up nearly 2% over the week. The value of the pound played a part in this, having fallen 12% against the US dollar early on, before recovering to 8% down by the time UK stock markets closed.
Monday 27 June
Things regressed from Friday. The value of banks, house builders and airlines all fell again as did the pound. The price of gold also went up.
By Monday evening things seemed to go from bad to worse. While England’s football team suffered a humiliating defeat against Iceland, the UK also lost its last remaining AAA credit rating. Standard and Poor’s cut the UK’s rating two places from AAA to AA citing concerns over the referendum vote and the likelihood of a recession.
Tuesday 28 June
The markets rebounded as bargain hunters came in looking for opportunities.
Thursday 30 June
Mark Carney, Governor of the Bank of England, gave his more considered reaction to the news. He hinted at the Bank cutting interest rates as early as July and emphasised the possibility of further Quantitative Easing (QE). He also spoke of the benefits of a weaker currency.
His words soothed investors and by Thursday evening, the FTSE 100 had reached new highs for 2016. The more domestically-focused FTSE 250 meanwhile was 6% below its pre-Brexit level, with its companies more sensitive to the falling pound.
Friday 1 July
The UK market continued its rally while government gilt yields entered negative territory for the first time. Expectations of interest rate cuts and more QE drove yields to record lows.
What could investors be considering?
While things have calmed down for now, we expect there to be more volatility ahead. Some companies saw their share price rise while others saw it fall after the vote. However we’d expect the change to continue to benefit some companies while harming others.
It’s impossible to predict the future which is why it’s important that any decisions made are based on your clients’ long term goals.