Anyone looking for clarity about the state of post-Brexit vote Britain has been left to untangle mixed messages on newsstands this week, as recent economic activity in the UK is hailed as proof of both a “Brexit bounce”, “Brexit boom” and a “Brexit tremor”, depending where you look.
As financial markets approach the relatively quiet trading month of August, investors appear equally equivocal about the country’s prospects, in spite of this week’s surprise rebound in the FTSE 250 stock index — seen as a barometer of domestic UK companies — to pre-referendum levels.
Tempting as it is to read the FTSE 250’s rise as proof that all is well, Garfield Kiff, UK fund manager at M&G, cautions that the advance hides a less positive story.
“Put simply, despite the steady aggregate numbers, the stock market has concluded the UK is heading for a sharp economic slowdown,” he says.
The revival of the FTSE 250 looks like a vote of confidence for UK plc, but within the index there has been a clear divergence between the outperformers, which have been largely overseas earners, and domestic businesses such as housebuilders, retailers, and challenger banks.
“The recovery is not 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,” he argues.
The FTSE 250’s ability to shrug off the 14 per cent plunge triggered by last month’s shock referendum result also goes hand in hand with persistent weakness in sterling and record low UK government bond yields.
UK-listed companies that earn revenues outside the country, and comprise about half of the index, have been buoyed by the fact that sterling remains almost 12 per cent lower against the US dollar than it was before votes were counted. This also explains why the FTSE 250 may be close to pre-Brexit levels in its domestic currency, but in dollar terms remains 11.6 per cent lower.
The pound’s weakness is why Mike Bell, global market strategist at JPMorgan Asset Management, is concentrating on larger, international-facing companies in the UK’s blue-chip index in spite of the mid-cap rally.
“We expect that large-cap UK stocks will outperform the FTSE 250 going forward, driven partly by our expectation of further sterling weakness,” he says.
SOURCE: Financial Times
