Post-Brexit Crisis, The FTSE 100 is Roaring Ahead.... Buy When There's Blood!

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

Nick Fletcher

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.