The performance of the FTSE 100 (INDEXFTSE: UKX) in the wake of last month’s Brexit vote has no doubt taken even the most optimistic stock market commentator by surprise. After some initial bumpiness, Britain’s blue chip index has strode resoundingly higher and struck 11-month highs around 6,700 points just this week.
This strength does have some logic. After all, the FTSE 100 is packed with companies whose massive international exposure minimises the possibly-negative implications of the leave vote. And of course many stocks with huge overseas operations also stand to gain from heavy sterling weakness in the months — and possibly years — ahead.
Pound perils
Indeed, demand for the UK’s big-caps could carry on rising should the pound continue to haemorrhage value as many experts are predicting.
Both HSBC and Goldman Sachs are convinced that sterling will plumb to 1.20 against the US dollar by the end of the year, worsening from the 31-year trough below 1.30 hit in recent days. And Deutsche Bank expects a slip to 1.15 in the months ahead.
Bank action
As well as reflecting fears concerning the domestic economy, the pound has also lost value as the market expects an imminent interest rate cut by the Bank of England.
However, this may not be the only round of action bank governor Mark Carney and the Monetary Policy Committee may have to take, with Nomura expecting another rate reduction in November.
On top of having further negative implications for the pound, the prospect of extra liquidity flooding into the system could bolster the FTSE 100 still further.
Withdrawal symptoms
The appointment of Theresa May as prime minister — thereby truncating a possible three-month wait for the next PM — has also propelled the FTSE 100 recently, soothing the nerves of those fearing a prolonged British withdrawal from the EU.
Although a remain supporter prior to June’s vote, May has vowed since then to deliver Brexit. But this is unlikely to be the end of the matter. Indeed, other EU leaders are likely to try to play hardball concerning access to the single market, a development that could still lead to huge delays in Article 50 being triggered.
Meanwhile, the likelihood of last month’s referendum being upheld remains a bone of contention as calls for a Parliamentary vote on the matter circulate; lawmakers pore over the whether Brexit is constitutionally viable; and the government negotiates while trying to hurdle a severe economic shock and possible break-up of the UK.
In other news…
The tetchy political landscape isn’t the only factor that could send the FTSE 100 sinking again. As I’ve long argued, the index’s huge weighting towards energy and mining leaves it in danger of a correction should supply and demand indicators continue to worsen.
For one, the stream of disappointing economic data from China is unlikely to end soon, piling further pressure on commodities suppliers.
On top of this, Britain’s blue chips aren’t completely immune to the prospect of a domestic recession. Banks like Barclays and Lloyds still deal at a significant discount to their pre-referendum levels, while housebuilders such as Persimmon have also fallen thanks to their dependence on a healthy British economy.
Given this broad range of factors, I believe it’s nigh-on impossible to confidently guess where the FTSE 100 will be moving to in the weeks and months ahead.
