Analyst encourages investors to consider their portfolio exposure as opportunities persist.
Brexit resignations spark market volatility amidst panic
- FTSE 100 rises as sterling dives on Brexit panic as Brexit secretary and other ministers resign.
- “I have never seen such polarised movements on a single day between UK and non-UK focussed stocks in the main index” says analyst.
- Analyst encourages investors to reconsider their portfolio exposure rather than pull out of the market entirely as returns elsewhere remain slim.
Up until this morning the news flow surrounding the Brexit negotiations has primarily been reflected in the movements of sterling and in the lead up to yesterday along with mutterings of a deal being announced, sterling had been appreciating and sat at above 1.30 against the dollar.
The stock market was however more distracted by other issues in the global economy namely the relatively sharp movements in oil and the fear that the global economy could be facing a period of slower growth.
However, there had been some hope in the stock market that after yesterday's cabinet meeting and without any resignations, that an element of uncertainty had been removed, following on from this the market would have hoped that parliament would have approved the deal. This all changed at around 9am this morning however, following the shock resignation of nobody other than the Brexit Secretary himself, Dominic Raab’s resignation shocked the market of which the reverberations of, led to a tumble of the pound.
Once again the news is most clearly reflected in sterling with it off-heavily against the dollar and Euro, roughly 1.5%. With further resignations having been announced, it seems that the ideal scenario for most businesses of a deal being agreed is slowly disappearing into thin air.
On the face of it, it appears that the FTSE 100 index is taking the news rather well with it actually rising up by a small amount, but this masks what is actually going on at the sector or stock level.
Naturally, the precious metals mining companies are doing well and leading the market higher. Also those businesses that are very international in nature, mostly the mega caps whose business is primarily exposed to other currencies other than sterling, are performing well. These are the big oil companies, the mining companies, large pharmaceuticals such as AstraZeneca and GlaxoSmithKline, and the globalised consumer businesses such as Unilever, Diageo and Coca Cola.
On the other hand there are many companies and sectors taking a pounding, mostly UK focussed businesses such as the housebuilders as fear mounts that uncertainty will put off buyers. The retail stocks have also been punished, as it is deemed that consumers may spend even less on the already troubled high street. Some of this sector's fall may however have been compounded by the publication of the latest set of Retail Sales figures at 9:30am this morning, which was much lower than what the market had anticipated.
Financial services companies are also taking a big hit; the big banks are leading the market down with UK Lloyds, RBS and Barclays down heavily. This will partly be due to the hit on consumer confidence, potentially resulting in fewer mortgages and loans being taken out.
Another interesting issue is how the Bank of England will react. Perhaps it will now take a cautious stance, meaning that the interest rate rises we were expecting will have disappeared, and this will do nothing for helping bank’s net interest margins. Also for financials in general, uncertainty in how they will operate in Europe has been brought into question. The news in recent weeks of a number of financial institutions enhancing their European based operations will now, with hindsight, be seen as being the right cautious decision.
In my 20 years in the city, I have never seen such polarised movements on a single day between UK and non-UK focussed stocks in the main index. Obviously, uncertainty has increased but this brings about the possibility of two polar outcomes, either a ‘No Deal’ exit or the possibility of another referendum or general election. A No Deal Brexit is bad enough but a general election and the possibility of Jeremy Corbyn as prime minister could be an even worse-case scenario for many businesses.
This leaves UK investors in a conundrum; the stock market still offers attractive long-term returns but they will now need to focus even more so on what underlying exposures they have. Since the referendum, the international giants have fared rather well and we take the view that this will probably continue.
Even if the global economy is slowing, there is growth nonetheless, and overseas earnings will be much more valuable as the sterling falls. On the contrary, the more domestically focussed companies will have to manage through a tough trading environment, take the potential hit to import costs, and decide how much of this to pass onto consumers as they have been doing since mid-2016. Investors should consider their portfolio exposure rather than pull out of the market entirely, as returns elsewhere will still be puny.
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