https://www.theguardian.com/business/2016/jul/01/post-brexit-apocalypse-why-markets-rising
Post-Brexit crisis, what crisis?
The FTSE 100 is roaring ahead
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 recorded its best weekly performance in
nearly five years, just a few days after the Brexit vote. Photograph: Kin
Cheung/AP
Friday 1 July 2016 19.10 BST
Last modified on Saturday 2 July 2016 14.54 BST
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?
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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”.
An AstraZeneca site in Macclesfield, Cheshire. The
FTSE 100 company’s shares have risen 15.5% since the referendum result.
Photograph: Phil Noble/Reuters
What have been the biggest risers
and fallers?
The biggest gains since the
referendum have been made by gold miners,
exporters with big dollar earnings, and companies with stable incomes such as
pharmaceutical groups, utilities, and food and drink companies. Housebuilders, banks
and airlines have led the fallers.
The top FTSE 100 risers since the
referendum:
Fresnillo +42%
Randgold Resources +36%
AstraZeneca +15.5%
Shire +15.4%
BP +15%
Diageo +14.9%
Mediclinic +14.9%
British American Tobacco +14.5%
Unilever +13.7%
National Grid +12.66%
The top FTSE 100 fallers:
Royal Bank of Scotland -32%
EasyJet -28.7%
Barratt Developments -28%
International Airlines Group (BA
owner) -27.8%
Taylor Wimpey -27.5%
Persimmon -26.5%
Barclays -25.1%
Lloyds Banking Group -24.6%
Travis Perkins -24%
Dixons Carphone -24%
The top FTSE 250 risers:
Acacia Mining +33.9%
Centamin +26.4%
Polymetal International +20.5%
Sophos Group +18.1%
Cairn Energy +10.1%
Pennon Group +9.8%
UBM +9.7%
Tate & Lyle +9.6%
Rotork +9.2%
JPMorgan Emerging Markets +8.9%
The top FTSE 250 fallers:
Shawbrook Group -42%
Aldermore Group -41.7%
OneSavings Bank -37.5%
Crest Nicholson -35.4%
Grafton Group 32.4%
Countrywide -30.7%
Galliford Try -30.6%
Ibstock -30%
Bellway -30%
Virgin Money -29.9%
What have private investors been
buying?
Quite a lot, by all accounts.
Investment management group Hargreaves Lansdown said that last week private
investors placed four times as many share deals as they did in a normal week.
And 70% of the trades had been buys.
The most popular purchases at
Hargreaves were companies that suffered the most in the initial sell-off
immediately after the poll result:
Lloyds Banking Group
Barclays
Taylor Wimpey
Legal & General Group
EasyJet
Aviva
Royal Bank of Scotland
Barratt Developments
Persimmon
ITV
Online trading group TD Direct
Investing said it had seen three times more trading volume since the referendum
than this time last year. Its chief investment officer, Michelle McGrade, said:
“The buy-to-sell ratio of our top two traded stocks, Lloyds and Barclays, stand
at 10:1 and 9.4:1 respectively. For Centrica, our third top traded stock, we
are seeing a whopping 37:1 in favour of buying. Gold also remains a safe haven
for investors with the number of customers holding funds with exposure to gold
increasing by 30% since the start of the year – a further 6% increase since the
same time last month.”
Meanwhile, company directors
including the Lloyds boss, António Horta Osório, and the Berkeley Group
founder, Tony Pidgley, have also been buying shares in their own companies
following the declines. According to the Financial Times, 100 executives in the
FTSE 100 and 250 bought £14.3m worth of shares in the past week.
Airlines, including easyJet, have been among the
fallers since the referendum and are proving attractive to buyers. Photograph:
Bernd Settnik/EPA
What about the outlook?
The continuing weakness in the
pound could well help the FTSE 100 hold on to its gains, although there is also
the possibility that investors may decide to cash in some of their recent
gains. A summer interest rate cut would also help leading shares, and keep the
pressure on sterling.
But with the continuing political
uncertainty and the prospect of some tricky negotiations between the UK and the
EU about their future relationship, there is likely to be continuing volatility
in the market. The approaching holiday season will lead to lower trading
volumes, which tend to exaggerate share movements in both directions.
And companies with large UK
earnings will still struggle as domestic growth slows.
If the base rate falls, could
some people effectively be getting free money from their mortgage lenders?
No. When the base rate was last
cut there were some borrowers whose mortgage payments should have turned
negative because they were on a rate that was below the Bank’s. At Cheltenham
& Gloucester, for example, there were customers on trackers 1.01 percentage
points below the base rate, while Halifax had offered a deal of base rate minus
0.52 percentage points. These deals, which have since finished, never went
negative – the lowest rate
anyone paid was 0.001%.
There are some customers on
lifetime deals that are not very far above the base rate. Woolwich and C&G
have both offered mortgages at Bank base plus 0.17 percentage points for the
whole of the mortgage term, while Chesham building society, which is now part
of Skipton, previously offered a rate just 0.09 above. If the base rate was cut
to zero, the small number of borrowers lucky enough to be on the Chesham deal
will see their interest payments shrink.
Will lenders stop offering
mortgages on London flats?
On Wednesday Singaporean bank UOB suspended lending on
London property and other banks in the
country warned investors to be cautious. Investors in the far east have been
courted by developers and estate agents selling new build apartments off-plan,
and the warnings suggest banks are concerned that prices might be heading
downwards. During the last financial crisis UK lenders put the brakes on
lending on new builds, reducing lending limits. The mortgage broker David
Hollingworth doesn’t expect to see a new crackdown. “Loan to values on new
builds have never returned to 95%, and some lenders still have different limits
for flats and houses,” he said.
