6 July 2016

Time to sit and wait

Things didn’t quite turn out as expected. We are to leave the European Union, but the FTSE 100 Share Index is higher at the time of writing than it has been for months.


While the initial knee jerk reaction was to mark shares sharply lower, the subsequent recovery has been no less surprising than the result itself. It all goes to show that markets have a life of their own and trying to second guess their behaviour is a mugs game.

It should be admitted, though, that with the benefit of hindsight, the way in which shares bounced back does make sense. Our benchmark index is composed of global businesses which, in aggregate, earn far more of their profits overseas than in the UK. Some companies, the mining giants being cases in point, barely receive any income from our domestic market. So with sterling declining, their profits should improve on purely a reporting basis. It’s an ill wind…

Those companies more focussed internally are having an altogether tougher ti me, as the relative underperformance of the FTSE 250 Share Index bears witness. This index of Britain’s second tier companies is much more domestically biased, so more vulnerable to any headwinds our exit from the European single market might create. On the other hand, though, a cheaper pound should aid our exporters. The ill wind blows everywhere.

Meanwhile, conscious of current uncertainties, Bank of England Governor Mark Carney has made clear he will do all in his power to help banks feed cash into our economy. A further cut in interest rates has been suggested – not that they are very high as it is. But in the political vacuum created by David Cameron’s resignation, and with turmoil in the Labour opposition, knowing that some action is being taken is welcome indeed.

Clearly, acting precipately must be unwise. While the slump in the fortunes of the pound is, perhaps, the most likely anticipated outcome of this surprise result, it would be wrong to assume that this will be a one way street. One currency trader of my acquaintance believes sterling was undervalued before the referendum and considers a bounce to pre vote levels a possibility. Who can say? It is far too early to make binding judgments, in my view.

True, sterling, property shares & funds and housebuilders have all suffered in our present uncertain situation. Also, we seem to be without a proper government for the time being. And any guidance on how the UK’s trading links with the rest of the world post Brexit might look could be years away.  It is worth remembering, though, that markets tend to overreact. We may yet look back on present turmoil as more of an opportunity than a threat.


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