Here’s a headline few thought they would see this year: “Time to take profits after Brexit vote.”
But here we are, more than a month after voters opted for Leave in the European Union referendum and the FTSE 100 at 6,724.43 is sporting a 14 per cent or 824 point gain from its immediate “poll shock” low. It is now up 21 per cent from its 12-month low of 5,536. The FTSE 250 Index – more reflective of the fortunes of UK-focused medium-sized companies – is still 3 per cent below its 12-month high, but it has rallied 15 per cent from its initial Brexit vote low.
These are potent gains and ones which few predicted as markets struggled to come to terms with the verdict of voters. The gains are even more remarkable given the backdrop of a slowing economy and a raft of surveys showing a marked drop in business confidence.
But investors have taken heart from loud hints from Bank of England governor Mark Carney that interest rates would be cut in order to temper the hit to business investment. New Chancellor Philip Hammond has reaffirmed that the 2020 budget deficit reduction targets will be scrapped and has hinted at a “reset” of economic policy in the Autumn Statement – widely interpreted as meaning fiscal loosening.
Cheaper money and more government spending: the two stand-by policy responses to fears of an oncoming recession – we will have to await confirmation of these and wait even longer to see if they have really staved off the recession threat. But for now investors have enjoyed the fresh uplift to equity prices.
And that uplift now looks to have discounted all the good news and turned a blind eye to continuing signs of a global slowdown. Indeed, markets could now be set for a combination of profit-taking and a reappraisal of an altogether sanguine outlook. Without further “good news” to sustain this level of equity prices, the rally of the past five weeks could now have run its course.
The financial news website Citywire carried a warning last week from Adrian Lowcock, head of investing at AXA Wealth, that investors should pay attention to the VIX, a measure of volatility known as the “fear index”. After spiking following the shock result of the EU referendum, it has now fallen to a 12-month low.
Lowcock believes that this could be a sign that stock markets are heading for another shock. “When it’s low,” he said, “people are confident and not fearful. And when it ramps up people are running for the hills. But it’s a counterintuitive index – it was this low just before the China Black Monday [sell-off in 2015].”
SOURCE: Scotsman – Bill Jamieson
