This was further evidenced by the US market which made an all-time high last week on the S&P 500. Currency moves were less pronounced over the period. Although sterling fell over 10% after the vote, it has since stabilised at these lower levels, whilst the Japanese Yen reversed its upward move, falling by 1.6% over the fortnight. Commodities did not move in tandem with the general ‘risk on’ move in markets, falling by 2.4% over the period including oil down 5%. Coinciding with the rise in equity markets, bond prices fell and US 10 year Treasury yields rose by 8bps. This reversal in bond markets was also apparent in Europe with German 10 year bond yields closing in positive territory last Friday for the first time in the post-Brexit era, at 0.006%. (The interest on a €100,000 investment would just cover the cost of a coffee and a cheese sandwich each year!). This of course is in stark contrast to say the yield on Vodafone of over 4.8% which in contrast on the same investment would allow you a couple of cases of Krug!
The aftermath of Brexit will inevitably pose challenges for the UK economy. However, after a period of chaos, a new government formed two months earlier than initially stated is positive for markets and investors otherwise trapped in a fog of uncertainty. Whilst commentators await clarity on the post-Brexit policy agenda, there is perhaps one area of policy certainty: the willingness of the Bank of England to offer stimulus packages.
In a U-turn from Carney’s intention to raise rates earlier in the year, the central bank appears to have entered a ‘do whatever it takes’ mentality ahead of the likely downward pressure on the UK economy. The majority of economists now expect a 25 basis point cut in interest rates in August and the Bank’s chief economist, Andy Haldane, stated last week that a “package of mutually-comprehensive monetary policy measures is likely to be necessary” and further clarity will be provided next month as part of the August inflation report.
We should not overstate the impact of the Brexit decision on the UK, or its effect on the rest of the world. The UK economy represents a mere 4% of global GDP and the recent announcement of Japanese technology giant Softbank’s purchase of British microchip designer and licenser ARM demonstrates that the attractions of the UK market are not solely based on its relationship with the EU, but it remains highly attractive to foreign investors after the fall in sterling. Let us not forget that London is one of the highest yielding equity markets in the world and falls in sterling only increase dividend cover from companies who earn the majority of their profits from abroad which is the case for most of the FTSE100. To put it another way – BP’s dividend is more secure now than it was a month ago.
The Bank of England’s latest Agents Summary of Business Conditions Report published on 20th July paints a more measured picture of the UK after a Brexit vote than you receive from the media. This report gathers information from a wide range of local sources and it stated that, “There is no clear evidence of a sharp general slowdown in activity,” and in addition that there is “little sign of any impact on consumer spending”. Looking at retail sales John Lewis, that bellwether of the British High Street, said spending was 3.2% higher during the second week of July than the same period last year. On importing inflation the Bank’s agents reported that competition would likely prevent retailers from passing on to consumers much of the inflationary impact of higher import prices. Unemployment figures released last week for the period before the vote showed unemployment at an eleven year low. While these numbers predate the Brexit referendum, there is evidence the labour market has remained buoyant since as recruitment giant Reed reports job vacancies in the three weeks from June 23 were 8% up on the same period last year.
I accept our Brexit vote has generated commercial concerns and the PMI index, released on Friday – a survey of business sentiment – indicated a modest contraction in July. However, given the recent media hysterics I was surprised the drop wasn’t sharper. In short, UK Plc is holding up well and we must look at the facts and not lets us talk the market down or the economy into a recession. I remain cautiously optimistic about the UK economy and the market and will use any weakness to add to long term holdings.