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One year on from that Brexit vote – industry comment

Graham Bishop, Investment Director at Heartwood Investment Management, said: “Sterling’s devaluation in response to the shock UK referendum result has been the most significant market event in recent years. It has yet to materially recover from its post-referendum low and now remains vulnerable to even more political and economic uncertainty. However, this year’s General Election result seems, at least, to have mollified some of the UK Government’s hard Brexit rhetoric, which has shifted to being more pragmatic and conciliatory. Uncertain domestic politics, economic cloudiness and more ambiguities around Bank of England policy lead us to maintain an underweight allocation to UK assets.”


Emmanuel Lumineau, CEO at BrickVest, said: “In the last 12 months we’ve doubled our investor base across Europe, which now represents more than €10 billion in AUM. We have seen increased investor interest from the UK, continental Europe and the US for both EU and UK commercial real estate investment opportunities. At the same time, our deal sponsor base doubled, which shows that the complexity and volatility induced by Brexit has become a major concern for both investors and sponsors, and thus an opportunity for an investment platform like BrickVest.

“We expect to see the highest level of volatility from the office sector as many international firms currently headquartered in the UK put decisions on hold over their long term office space requirements. Indeed our research showed that 20% of property-focussed institutional investors believe the office sector will present the biggest European real estate investment opportunity.

“We now have an office in Berlin to source talent on both sides of the Channel, and announced our first successful exit, achieving returns of 31% whereas in comparison, the FTSE EPRA/NAREIT Developed Europe Index generated a return of 18% over the same period.”


Nick Dixon, Investment Director, Aegon said: “After an initial sharp fall in the immediate aftermath of the referendum vote, markets soon returned to previous levels, as those firms reliant on exports or who generate their profits abroad benefited from the sharp falls in sterling. Economic fundamentals remained in good shape and the UK equity market growth continued at only slightly subdued levels relative to global markets for much of the year. However, gilt yields remain unattractive, offering a negative return in real terms, and the weakness of the pound has increased pressure on the MPC to raise interest rates.

“While the general election, weakening wage growth and rising inflation have unnerved markets in recent months, there are a number of reasons to be more positive about the prospects of the UK markets over the medium term. With the Conservative minority government needing to seek consensus for its legislative programme, the UK market is likely to respond favourably to the increased possibility of a softer Brexit and greater capacity for public spending.”


Jim Leaviss, Head of Retail Fixed Interest at M&G Investments, said: “One year on from the Brexit vote and a number of its knock-on effects for the UK economy are still very much in focus. Sterling’s steep decline, for example, was among the immediate headlines after the referendum and the currency’s lower value has persisted to become the main driver of rising inflation. In turn, this ‘cost-push’ (= ‘bad’) inflation is straining consumer confidence and real income levels, which is a headwind that will need close monitoring in the UK’s heavily consumption-driven economy. It’s a key point just noted by Bank of England Governor Mark Carney in his Mansion House speech, and a main reason why interest rate rises are on hold for now despite the recent higher-than-expected Consumer Prices Index (CPI) readings.

“This month’s UK general election, meanwhile, was a poor result for Prime Minister Theresa May, having gambled that the move would significantly boost her majority ahead of the pending Brexit negotiations. Instead, with the outcome of a ‘hung parliament’, we face the possibility of a new Conservative Party leadership battle and even another general election later this year. Such renewed uncertainty seems unlikely to be helpful to the UK’s negotiating hand in Brussels.  In the long term, I believe the impact of Brexit will largely depend on trading relationships. Importantly, higher trade barriers, if implemented, will adversely affect growth and productivity in the short to medium term. However, much will depend on how the negotiations progress over the next two years, and it remains too early to speculate on what the impact might be in financial markets.  The fall of the pound in the aftermath of the hung parliament vote was relatively modest (less than 2% against its major trading partners), suggesting that some expect the election result to produce a ‘softer’ version of Brexit.  The fundamental valuation of sterling may have also prevented bigger losses for the currency – on a Purchasing Power Parity (PPP) measure (an example of which is the Economist’s “Big Mac Index”), the pound is already a very ‘cheap’ currency, perhaps 12% below its fair value.

“From the softness evident in retail sales, house prices and inflation-adjusted incomes, the momentum of UK economic growth is fading as we move through 2017. As the election result and ongoing Brexit-related uncertainty suggest this trend continuing, the BoE’s monetary stance remains dovish, although the views of its rate setting committee have become more divided against the rising inflation factor (and a speech by MPC member and Bank of England Chief Economist Andy Haldane this week suggested he was considering joining the ‘hawks’ on the Committee, provoking higher short-dated gilt yields). For government watchers, the new, weaker Conservative administration may apply less austerity and fiscal tightening in future, but we do not yet expect a significant rise in gilt issuance.  The goal of reducing the UK’s debt/GDP over the next few years is likely to remain in place, but the ratings agencies are getting nervous, and further downgrades to the UK’s credit ratings are increasingly possible.

“My global bond strategy has generally underweighted sterling exposure since before the Brexit vote (I’ve long been worried about the UK’s current account deficit), with preferred currency exposures that have included a sizeable (but reduced in the wake of the large ‘Trump bounce’) allocation to the US dollar.  Within bond markets, my favoured exposures include US dollar-denominated floating rate bonds from blue-chip banks and financial issuers, largely as a play on the strengthening US economy and rising US interest rates.  I’ve lately reduced some corporate bond exposure within my funds – not because default rates have become worrying (they remain very low), but because they’ve performed so well over the past year and valuations have become less attractive.”


Laith Khalaf, Senior Analyst, Hargreaves Lansdown:

Brexit one year in – winners and losers in financial markets

Friday marks the one year anniversary of the day Britons went to the polls and surprised themselves, and financial markets, by voting to leave the European Union. Since then the pound has sunk, the stock market has risen and Brexit talks have finally begun. Below is a summary of the performance of key financial markets and indicators since the referendum last June.

  • Strong Footsie performance is overshadowed by international markets
  • Small cap index beats blue chips
  • Chances of an interest rate rise slashed
  • Cash ISA rates halve
  • FTSE 100 gets even more concentrated in mega caps
  • Best and worst performing Footsie stocks

‘The main financial effect of Brexit has been felt in the pound, though weaker sterling has pushed up inflation and also boosted the stock market. Holidaymakers have probably been the most obvious losers from Brexit so far, though inflation is also gradually ratcheting up the pressure on consumers more broadly.

This dynamic is playing out in the stock market too, with companies either directly or indirectly servicing the domestic consumer suffering since the vote. Dixons Carphone, Travis Perkins and Berkeley Group are three companies who can attribute a large part of their relegation from the benchmark FTSE 100 index to concerns over consumer demand stemming from Brexit.

It seems like a long time ago now, but commercial property funds also had a torrid time in the wake of the Brexit vote, as high levels of withdrawals led to trading being suspended in several multi-billion pound funds. The sector has since regained its composure, though the episode served to reiterate the significant drawbacks of investing in open-ended commercial property funds.

Overall the UK stock market has performed very strongly since the EU referendum, though it’s actually a laggard compared to the return UK investors have received from overseas markets. That’s because weaker sterling has been one of the key drivers of the Footsie, and that currency boost is even more powerful for overseas markets, when returns are converted back into pounds and pence.

This currency effect is also reflected in the performance of the different strata of the UK stock market, with the big international blue chips of the FTSE 100 outperforming the more domestic midcaps. However the FTSE Small Cap index has surprisingly returned more than the FTSE 100. On the face of it this may seem like a sign of the strength of the domestic economy, however the headline small cap index is heavily populated with investment trusts, many of which invest in overseas equities. Stripping out the performance of these trusts leaves the small cap index lagging slightly behind the FTSE 100 since Brexit, still a very strong showing, but worthy of only second place on the podium.

UK government bonds have continued to eke out a pretty decent return for investors, despite legitimate concerns that these bonds are in bubble territory. The residential property market has been somewhat disappointing against the backdrop of more robust growth in recent years, though younger savers working hard to keep pace with house prices might breathe a sigh of relief that the treadmill has slowed slightly. Gold has also seen its star rising for UK investors, but this is almost all a function of weaker sterling; in dollar terms gold is trading at roughly the same price it did on referendum day.

Cash returns meanwhile continue their limbo dance, and remarkably the typical rate cash ISA rate has halved from the already low level of 0.8% last June, thanks to the Bank of England’s interest rate cut following the Brexit vote. Meanwhile an interest rate rise by the end of this year has gone from being a shoo-in to an outside shot, despite the recent appearance of some hawkishness within the Monetary Policy Committee. The resurgence of inflation makes the low interest rate environment even more punitive for cash savers because their money is losing its buying power even faster.

A year after the referendum, Brexit talks have now finally begun, which may cause some to reassess their investment strategy. However, the performance of capital markets over the last year tells us that the financial effects of Brexit are about as predictable as the British weather. Investors should therefore stick to proven means of building up a decent nest egg, by squirrelling away as much as possible, maintaining a diversified portfolio, and using tax shelters to protect profits from the taxman.’

UK and international markets

 

Total return

 

Value of £100 invested

UK indices
FTSE 100 22.6% £123
FTSE 250 17.2% £117
FTSE Small Cap 26.0% £126
FTSE Small Cap (without investment trusts) 21.1% £121
FTSE All-Share 21.8% £122
Overseas indices
S&P 500 38.2% £138
MSCI Europe ex UK 38.9% £139
CAC 40 (France) 40.7% £141
DAX 30 (Germany) 43.7% £144
Topix (Japan) 41.4% £141
MSCI Emerging Markets 45.2% £145
Other assets
FTSE Actuaries UK Gilts 6.2% £106
Gold 15.6% £116
Moneyfacts Average Instant Access Account 0.3% £100
UK Nationwide House Price Index 2.4% £102
UK Consumer Price Index 2.9% N/A

Source: Thomson Reuters Lipper, income reinvested, 23/06/2016 to 20/06/2017

Currency, gilts and interest rates

As has been well documented, the pound has suffered heavy falls since Brexit. Likewise cash rates have fallen further from already exceptionally low levels, and the chance of an interest rate rise by the end of this year has been significantly downgraded. The fall in interest rates will be particularly keenly felt by cash savers because of the simultaneous increase in inflation, making their cash income even more stretched in terms of what they can buy.

23rd June 2016 20th June 2017
GBP/USD 1.4877 1.2629
GBP/EUR 1.3072 1.1343
Chance of UK interest rate rise by 2018 86.1% 20.4%
10 year gilt yield 1.4% 1.0%
Average cash ISA 0.87% 0.41%

Source: Bloomberg, Bank of England

FTSE 100 top 10 performers

All of the top 10 performing stocks have significant international earnings which have helped propel their stock price performance thanks to weaker sterling. There are other factors at play too however; for instance commodity producers Glencore and Antofagasta have benefited from price rises in the stuff they dig out of the ground, and Ashtead has been given a leg up by hopes that President Trump will push through a US construction splurge.

The bottom of the performance table also has a Brexit flavour to it, with the retailers, ITV, and Travis Perkins all suffering from Brexit blues. Indeed the companies highlighted in red have all been relegated from the FTSE 100 index since last June. However, some of the factors at play here are nothing to do with Brexit. BT has faced an accounting scandal in its Italian division and an OFCOM fine, and while belt-tightening may have hindered Capita’s performance, there have also been problems with some of its contracts (notably Transport for London and Co-op Bank) and a questionable sale of Capita Asset Services to shore up the balance sheet, all of which has led to the CEO stepping down. Meanwhile Hikma has been hit by delayed failure to get US approval for its generic version of the blockbuster drug Advair.

Overall while Brexit, and particularly the fall in the pound, has set the tone for market performance, there have still been plenty of other factors which have played their part in stock price movements. And while domestically focussed stocks have undoubtedly been hit by Brexit, many have seen a significant bounce in their share prices since the days and weeks immediately following the referendum, when there was even greater concern around the fate of the UK economy.

The table below is based on the constituents of the FTSE 100 as they stood on 23rd June 2016.

Name % Total Return % Price change
Glencore PLC 82.5 80.8
Antofagasta PLC 74.9 71.6
Coca-Cola HBC AG 73.2 69.4
3i Group PLC 65.7 60.4
InterContinental Hotels Group PLC 64.1 55.0
Burberry Group PLC 63.1 58.3
HSBC Holdings PLC 61.5 51.5
Mondi PLC 56.8 52.7
Ashtead Group PLC 55.0 52.2
Carnival PLC 53.5 49.4
Royal Mail PLC -14.6 -18.4
ITV PLC -14.9 -19.8
Kingfisher PLC -15.0 -17.5
Mediclinic International PLC -16.9 -17.3
Travis Perkins PLC -19.2 -21.5
Next PLC -24.1 -27.3
Hikma Pharmaceuticals PLC -26.8 -27.8
Dixons Carphone PLC -27.5 -29.5
BT Group PLC -32.5 -34.9
Capita PLC -35.0 -38.4

Source: Bloomberg, total return is with income reinvested, 23/06/2016 to 20/06/2017

FTSE 100 juices are quite concentrated

Since 23rd June 2016 the Footsie has risen by 18% (without dividends because it is a price index). It is worthy of note that half of this rise can be explained by the performance of 7 companies (listed below).

HSBC Holdings PLC
British American Tobacco PLC
Royal Dutch Shell PLC
AstraZeneca PLC
Glencore PLC
Diageo PLC
Unilever PLC

The strong performance of the mega caps has led to further concentration of the benchmark index in the very biggest stocks. The biggest 10 stocks accounted for 42.7% of the index on 23rd June last year; they now account for 46.1%. Or to look at it a different way, half of the index by weight used to be comprised by the biggest 14 companies, it’s now comprised by the biggest 12. There’s no doubt the index was already concentrated, but it’s become more so as a result of market movements since the EU referendum.

The result is, for the time being at least, movements in the headline FTSE 100 index will be even more heavily influenced by the performance of the big stocks at the top. Nor does the UK’s headline index include dividends, which as we know are a key source of stock returns. So while the day to day movements of the index may still serve as a quick litmus test of market sentiment, the headline FTSE 100 index is not always a good barometer of the fortunes of the UK economy, or indeed the typical UK investor.