In the run-up to the EU referendum many financial commentators forecast a stockmarket meltdown in the event of a leave vote, yet within days of Brexit becoming reality, stockmarkets were confounding these pundits by touching new highs.
With the FTSE 100 not following the ‘Armageddon’ script (due to defensives dominating the index and a large number of big dollar earners), media attention quickly moved to using the FTSE 250 index as the barometer for the health of the UK economy.
A month on from the referendum, it might be tempting to conclude that the stockmarket is relaxed about the outcome with the FTSE 100 some 7% higher than its pre-Brexit level and the FTSE 250 now only around 2% below its pre-Brexit level (see following chart).
Mainstream media has seemingly viewed this recovery in the FTSE 250 as an indication that all is well with the underlying economy. Certainly that was the impression I got watching economic reports on the news the other night.
However, we would argue that the real story of Brexit is not the varying returns across the different UK equity indices, but the real divergence in returns between different sectors. Put simply, despite the steady aggregate numbers, the stockmarket has concluded the UK is heading for a sharp economic slowdown.
As the following chart shows, the share prices of many leading domestic companies – notably housebuilders, retailers, construction companies and challenger banks – have all fallen between 25% and 40% since Brexit. Contrast this with the outperformers that are a mix of overseas earners, gold stocks and an odd collection of highly-levered miners.
So while the FTSE 250 is broadly unchanged, we do not believe this is a vote of confidence in the prospects of the UK economy as, much like the FTSE 100, the international and somewhat esoteric make-up of the 250 disguises some sharply divergent share-price performances.
In reality we won’t even begin to get a steer on the real effects of the referendum on the UK economy (if any) until the autumn, as July and August are quiet trading months for most companies. For now we’re left in a bit of a vacuum with share prices likely to remain very volatile, until we can grasp where the earnings in the domestic cyclicals are heading and whether the knee-jerk response to the referendum result is correct.
In the meantime, despite Christine Lagarde’s assertion that Brexit has “thrown a spanner in the works of global economy”, UK investors continue to seek refuge in the mining sector, which given the chronic value destruction of the past few years, is a rather daunting thought.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.