We are now over a week since the Brexit result was announced and we have had a few days without any further seismic political announcements.
The gyrations in the markets appear to have stabilised somewhat and so it is probably a good point at which to take stock of price levels from just before when the surprise result was announced.
The UK equity market, as measured by the FTSE 100 is up by 3.8 per cent to last Friday (source: FE Analytics) which is a surprise to most and has contributed significantly to a steadying of nerves.
Performance of index between 24 Jun and 1 Jul 2016
Source: FE Analytics
However, this is largely a result of Mark Carney announcing that he is considering further monetary stimulus over the summer if required. The equity market interpreted this as meaning that interest rate cuts and possibly additional quantitative easing could be due and that means recycled investor cash into risk assets, such as equities.
In addition, the FTSE 100 has particularly benefited due to the high proportion of overseas earnings which will be flattered in a weak sterling environment.
The more domestic orientated FTSE 250 has not been so fortunate and has fallen by 5 per cent over the same time period whilst the Small Cap index is down by 1.6 per cent. So a near 9 per cent differential between the large-cap and mid-cap indices.
It is therefore doubly important to dissect what has been happening within the underlying sectors as there will be value opportunities where Brexit fears could have been overdone.
The weakest has been commercial property, which as a sector is down by 15.2 per cent since 23 June 2016. This is closely followed by general retailers, down by 11.4 per cent and banks which are 10 per cent weaker.
Life assurance, telecoms, leisure and automobiles are the next weakest due to a combination of perceived impediments to their global competitiveness and worries concerning the impact of a mild recession.
The most resilient has been pharmaceuticals, up by 13.5 per cent followed by other big overseas earners such as tobacco, oil & gas and mining, which are big US dollar plays and all up by over 10 per cent as sterling has sold off.
Performance of sterling vs dollar over 2016
Source: FE Analytics
The more defensive sectors of utilities and healthcare are similarly strong being perceived as a safe haven as the economy slows down.
Sterling is now 11.5 per cent weaker against the US dollar and 9.4 per cent weaker against the euro, at the time of writing. Government bonds are 5.5 per cent stronger with yields from some short-dated gilts now negative, adjusting for the prospect of more money-printing.
It would be fair to say that 2016 is now a year of two halves, pre and post the Brexit vote and the influences going forward are now highly subjective and a leap into the unknown. This presents challenges for tactical investment strategy and the identification of what are legitimate concerns and what are just hypothetical scare stories.
The picture is just as confused in the investment world as it is in the voter’s world, with hard facts very difficult to identify with any acceptable degree of confidence.
Following the removal of Boris Johnson from the leadership race, the political landscape has shifted away from a strong Brexit mandate to one incorporating a more moderate approach. If Teresa May is elected as leader, there will probably be sighs of relief in Brussels that the combative stance of Gove and Johnson has been diluted.
The direction of travel in global trade agreements is moving very much towards the environment that the UK enjoyed whilst in the EU. Whilst the EU is adamant that we cannot have open trade without free movement of labour, most of the new trade agreements currently under negotiation provide just that.
So, bizarrely, this presents the situation, that even if we hadn’t had the Brexit vote, when observing new trade agreements yet to be agreed, we may well have come to a similar conclusion regarding our EU membership, without all the scaremongering.
Whatever deals are done over the next two years or so, there will be considerable moaning and groaning from all camps as to whether we have been badly treated and whether our new leaders have extracted the best deal.
Unfortunately, one fact remains whilst all this uncertainty persists.
For as long as it takes, investment decisions have become a lot harder and that undoubtedly will do no favours for economic growth. Overseas earnings are therefore likely to remain attractive in this environment and this will influence our investment decisions.
Guy Stephens is managing director at Rowan Dartington Signature. All the views expressed above are his own and should not be taken as investment advice.
