It Took Just Four Days for British Megacaps to Shake Off Brexitby
Though the FTSE 250 of midcap shares is still suffering
FTSE 100 is among year’s best-performing developed markets
It was only a blip.
A weaker pound, rising commodity prices and central-bank reassurances have pushed Britain’s FTSE 100 Index back to where it was before June 23, the day of the referendum on the country’s European Union membership. The benchmark gauge, made up of international giants, rallied 6.3 percent in the past two days, the most since 2011, erasing its losses from the previous two. It closed at its highest level since April.
The FTSE 100 has suffered less than regional peers and domestic gauges as its exporters benefited from a weaker currency. Since the vote to leave the EU triggered a global market selloff, HSBC Holdings Plc and Citigroup Inc. have raised their ratings on Britain’s biggest stocks, while JPMorgan Chase & Co. and Societe Generale SA said they’re still bullish. Both the Bank of England and the European Central Bank stressed the availability of liquidity within hours of the results.
“The dust settled very quickly,” said Alan Higgins, who helps oversee 14 billion pounds ($19 billion) as the London-based chief investment officer at Coutts & Co. He said his firm had put in an order to buy the dip in the FTSE 100 in the event of a win for the “Leave” camp. “We’ve been fairly confident on the FTSE 100 -- it’s the most clear investment to pick up after the Brexit vote. The reality is: life goes on for most of these companies.”
Investors were cautious before the referendum, pulling money out of U.K. equity funds in eight out of nine weeks, according to a Bank of America Corp. report dated June 23 citing EPFR Global data. Now the FTSE 100’s valuation of 15.4 times estimated earnings is near a record high relative to the Euro Stoxx 50 Index of the region’s shares, which are still down 6.8 percent since June 23. The dividend yield of firms on the U.K. gauge is also 3.4 percentage points more than 10-year government bonds, near the biggest-ever spread.
Financial firms, which led losses in the immediate aftermath of the referendum, have been frontrunners in the rally that followed. Prudential Plc, Legal & General Group Plc and Hargreaves Lansdown Plc have rebounded at least 13 percent since June 27. Lloyds Banking Group Plc, which slumped 29 percent in two days, has recouped 8.5 percent.
The FTSE 100 is heading for its biggest monthly rise since October, even as there has been little clarity on the timeline of an actual exit, with the U.K. in the grips of a political upheaval. Prime Minister David Cameron left it to his successor, due for appointment in early September, to formally activate the mechanism to leave the EU, while the opposition Labour Party chief Jeremy Corbyn lost a confidence vote but pledged to carry on as leader anyway. In Scotland, First Minister Nicola Sturgeon is pressing for for a new referendum seeking independence from the U.K.
While the gauge of British megacaps has returned to gains for the year -- making it the third-best performer among developed markets -- most of it is down to the plunging currency. In dollar terms, the FTSE 100 has lost about 8.5 percent since June 23. Most economists in a Bloomberg survey predict the “Leave” vote will force the BOE to increase stimulus, including cutting interest rates in the third quarter, which will put even more pressure on the pound. Almost three quarters of respondents said the economy will slip into a recession.
Meanwhile, the FTSE 250 Index of midcaps is reeling, down 7.7 percent since the referendum, as its members are more vulnerable to an economic slowdown. Its companies on average generate about half of their sales in the U.K., according to UBS Group AG calculations, with members including homebuilder Bellway Plc depending on the country for all of their revenue.
In addition to the BOE and ECB, the Swiss National Bank intervened in the foreign-exchange market to contain volatility following U.K.’s vote. Bank of Japan Chief Haruhiko Kuroda said Wednesday that more funds can be injected into the market should they be needed, while projections for another Federal Reserve rate hike have been pushed back to as late as 2018.
“There’s the expectation that global leaders will act to calm down the nervousness that stocks saw immediately after the vote,” said Pedro Ricardo Santos, a broker at X-Trade Brokers DM SA in Lisbon. “But despite the quick rebound, it might still be premature to say that markets will just move on peacefully from here.”