Investors should hold tight before believing that the FTSE 100 index is already on the path to recovery following Thursday’s EU referendum, according to a selection of investment professionals.
A majority of those who have commented believe that individual global-facing stocks that account for large proportions of the blue-chip index and a general disunity between certain sectors are the primary reasons for the index’s sudden snap back to heights not seen for almost a year.
UK investors’ nerves surrounding the impending EU referendum came to a head two weeks ago when the FTSE 100 closed at its lowest level since February’s mass sell-off.
While the index dipped again on the Monday after the results were announced, it is now at its highest peak year-to-date just three days later as a result of Mark Carney's announcement of potential rate cuts and quantitative easing to bolster the economy.
Performance of index in 2016
Source: FE Analytics
This has come as a surprise to many investors, given that markets historically dislike uncertainty and that Britain’s exit from the EU is unchartered territory. 
In an article published three weeks prior to the referendum, FE Alpha Manager David Coombs (pictured) told FE Trustnet that the cash weighting across his portfolios is higher than ever, purely because of fears that a Brexit really could happen despite market complacency.
“You might have thought there would be a little more volatility in the UK market and I’m surprised there hasn’t been,” he said.
“Yes the more domestic-facing stocks have underperformed versus some of the more international stocks in the index, but it makes me very nervous that the market just seems to be discounting a Brexit win and that’s caused slight concern.”
Now that the referendum has resulted in a ‘leave’ vote, though, the UK blue chip index appears to have performed strongly, having now reached a 12-month high.
Should investors be worried about this sudden upward swing or does it mean they can now breathe a sigh of relief?
Simon Smith, chief economist at FxPro, said: “As always, the FTSE 100 acts an illusory indicators of the UK economy. The fact is that it has recovered all of the losses seen in the wake of Brexit. Happy days I hear you say.”
“The fact also remains that it’s, to a fair degree, a measure of how companies are doing that dig lots of stuff out of the ground and sell it in dollars. Oil companies make up three of the top six constituents and they have been flying because of the currency moves, up around 10 per cent since the vote.”
As such, he attributes the FTSE’s move to the sterling’s negative reaction to a majority ‘leave’ vote rather than because it has positively impacted the economy.
When observing the stocks that aren’t dependent on the dollar or overseas trade, Smith says that the market looks a lot more disparate.
“Banks remain a lot weaker, dented by the uncertainty related to financial services, especially with France biting at the heels of the euro clearing market. Domestic housebuilders remain on the floor, Persimmon down nearly one-third, with Easyjet down by a similar amount,” the chief economist added.
Joe Rundle, head of trading at ETX Capital, agrees that the FTSE 100’s strong performance purely hinges on the large international firms and argues that its heavy weighting towards these stocks is misleading.
What’s more, he says that investors can’t ignore the fact that the domestic-facing FTSE 250 index is down almost 7 per cent, suggesting that all isn’t as rosy for the UK as it seems.
“The likes of Fresnillo, Randgold, AstraZeneca, Royal Dutch Shell, British American Tobacco – these are hardly dependent on, or reflective of, the UK economy. They’re listed in London but their earnings come from abroad,” Rundle explained.
“There is a key distinction. UK-focused firms are doing much, much worse. EasyJet, Lloyds, Barclays, RBS, Barratt, Taylor Wimpey – they’ve all recorded 20 per cent losses since the Brexit vote.”
“As we said ahead of the vote, there was always the chance the FTSE 100 would hold firm because 75 per cent of earnings come from overseas, propping up the index as the pound slumped.”
The head of trading says that this cannot be ignored, given that firms such as Vodafone and EasyJet have suggested they may move abroad. If they do, he warns that the FTSE 100’s performance will begin to mirror the weaker, domestic-facing indices.
“If Britain cannot secure enough access to markets to remain attractive as a place for big global firms to headquarter, we all suffer,” Rundle continued.
“Pension funds will be a lot more exposed to the UK economy, which if the forecasts are right will be smaller and more fragile than it is now.”
Laith Khalaf, senior analyst at Hargreaves Lansdown, says that approximately one third of FTSE 100 stocks have actually fallen in value by more than 10 per cent since the referendum and that one in seven have fallen by more than 20 per cent.
Because of the fact that a select handful of FTSE 100 stocks have risen by more than 10 per cent and account for much larger weightings within the index, he says that these dips have been camouflaged.
“The last few days have seen a tale of two stock markets playing out on the UK’s trading floors. The share prices of big companies with international revenues have prospered, while those exposed to the UK economy have been severely marked down,” he said.
“However, in the last two days these domestic stocks have bounced significantly. It’s quite remarkable how quickly sentiment can move the price of stocks up and down without so much of a hint of company news. This once again serves to highlight why investors should tune out the short term fluctuations of the stock market, because they often defy rhyme and reason.”
Performance of indices over 1month
Source: FE Analytics
Over the longer term, the senior analyst explains that bottom-up company fundamentals will play a greater part in overall market performance as opposed to sentiment and as such, investors should still approach UK stocks with caution.
“In the meantime companies will still seek out opportunities for profits and for growth, though there will be winners and losers, so it’s probably a good time to get back to basics and maintain a balanced and diversified portfolio,” he added.
Not everyone is as dismissive of the FTSE’s recent performance, though.
Jordan Hiscott, chief trader at ayondo markets, says that the index is “defying doomsayers” with its performance and argues that value traders have been able to take advantage of the immediate falls from the likes of Barclays and RBS.
Performance of stocks over 1month
Source: FE Analytics
“A ‘leave’ vote was expected to batter the FTSE over a prolonged period, but interestingly, in the same time frame, the DAX, EUROSTOXX and CAC have all underperformed on a surprisingly large scale. Indeed last Thursday the DAX closed at 10,258, whilst today it has only managed to recover to 9,575 - a fall of some 6.8 per cent,” he pointed out.
