Post-Brexit vote: Market and portfolio performance update

Shaun Port


7 min read

We’ll be publishing regular updates to this blog as the economic story unfolds after the Brexit vote.

Day 6: Friday 1st July

It was another positive day in financial markets, as the US stock market continued to lead the way following on from another good end to the New York trading day last night. The US S&P 500 index climbed 1.4% yesterday and a further 0.3% by London close today. The FTSE 100 gained 1.1% outpacing Europe (+0.6%).

As the days tick past since the Brexit vote, news of cutbacks to business activity is starting to filter through. The Financial Times reported today that London commercial property deals worth £650m have been curtailed as a result of the vote, while Easyjet is considering a relocation of its legal headquarters from the UK to a EU state. We would expect a steady stream of news like this to come out over the next month or so.

Away from the Brexit news, economic data shows that global manufacturing was recovering in June, including the UK, helping confidence in the global economy. Nevertheless, investors remain cautious – both long-dated government bonds and gold (+1.5%) performed well today despite the rise in stock markets.

Source data: Bloomberg

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Day 5: Thursday 30th June

Unlike the last few days, there was actually some (real) news today.

The decision by Boris Johnson not to stand for the leadership of the Conservative Party had no impact on markets, but the speech by Mark Carney, the governor of the Bank of England in the final hour before UK markets closed has had a dramatic impact on what was a lacklustre day.

In keeping with his pre-vote statements, Carney described Brexit as “a large, negative shock”, such that “the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer”.  In other words, the bank will cut the base rates sooner rather than later. But he also warned against adopting negative interest rates, as in the eurozone, Denmark, Switzerland and Japan: “as we have seen elsewhere, if interest rates are too low – or negative – the hit to bank profitability could perversely reduce credit availability or even increase its overall price.”

This intervention comes earlier than investors had expected. Not surprisingly, the pound fell sharply (-1.6% against the dollar), government bonds rallied with the ten-year yield falling to a new record low of 0.86% (a return of 0.4% for all-gilts and 1.0% for above 15-year gilts) and the FTSE 100 surged 2.3%; the FTSE 250 lagged with a 1.7% gain. Lloyds and RBS shares fell by 2.6% and 4.8% respectively.

The government can now borrow for two years at just 0.08% per year, or for five years at 0.34%. Lower market interest rates will likely feed through into lower mortgage rates in the coming weeks, so Carney’s comments will start to positively impact the economy even before the base rate is actually cut. We expect two interest rate cuts this year, to take the bank base rate down to close to zero.

Overall, this is positive news, but it doesn’t change our view that markets in the near term are likely to remain quite volatile.  Our portfolios are positioned to account for this turbulence.

Source data: Bloomberg

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Day 4: Wednesday 29th June

We expect that the news headlines tomorrow will be all about the FTSE recovering its losses following the Leave vote, after a 3.6% surge today. So, is everything OK now? This is good news, but it doesn’t really tell the true story. The collapse in the pound (up 1.4% today against the dollar) has supported the FTSE overall, with its high share of foreign earnings. Domestic focused stocks have taken a big hit from Brexit.

For example, despite today’s bounce, Easyjet shares are still 29% lower than before the vote. The FTSE 250, with its much higher domestic UK-focus, is down 6.9% since 23rd June and has lagged the FTSE 100 by 9% this month – the second worst (relative) month for the FTSE 250 in the past 30 years. So while internationally-focused UK Plc may be OK, home-grown UK Plc has to bear the brunt of a weakening economy and a zombie government.

As was the case yesterday, there was little in the way of good (or at least, less bad) news to propel the surge in stock markets. So far, this appears to be a relief rally, on the basis the world hasn’t ended post-Brexit and a compromise may be possible. That said, bond markets are singing a different tune. Yields fell across the world today, with UK government bond yields only just above their historic lows. The gilt market as a whole returned 0.3% today. Gold also gained 0.8%.

It’s always tempting to find a story or news release that explains the movements across all the markets in one day. With so little news on Brexit, we’d suggest that today’s moves hint that investors are considering the potential for additional stimulus from many central banks across the world, including the US Federal Reserve not raising interest rates for several years.

Source data: Bloomberg

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Day 3: Tuesday 28th June 2016

A brighter start to trading in Asia this morning gave a lift to European markets today, followed by gains in New York trading hours.

There was little news today, or more importantly, there was no more bad news. The only thing to note was that Angela Merkel said the UK would need to serve notice under Article 50 of the Lisbon Treaty before they could start any talks on an EU-UK trade deal. As we understand it, serving notice would require an Act of Parliament. But before that the country needs a new prime minister and perhaps a general election as well. So, this looks like months of uncertainty ahead.

Stock markets and the pound staged somewhat of a rally today, albeit the rise in the pound was underwhelming – gaining only 0.7% against the euro. The FTSE 100 gained 2.6%, the FTSE 250 was up 3.6% and Stoxx (continental Europe) rose 2.3%. Although these increases are small, we used the opportunity of a bounce in markets to reduce holdings in European stocks today.

Last night the ratings agencies Standard & Poor’s and Fitch cut the UK’s prized credit rating. For markets this is largely a non-event, given that it was well-flagged. Beyond the obvious concern that a recession will hit the public finances, S&P cite the likely breakup of the United Kingdom as a key reason the UK will lose its status as a safe haven, both politically and economically. Gilt yields are being driven lower by recession fears and rate cut hopes, and this is far more significant. Gilts have returned more than 4% over the past three days, and we expect further gains into July.

Source data: Bloomberg

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Day 2: Monday 27th June 2016

Following on from Friday’s sell-off, equity markets have continued to head lower on Monday as investors continue to digest the implications of the historic Brexit vote. Political paralysis in the UK has not helped investor confidence and the Chancellor’s comments have done little to restore confidence.

The FTSE All-share – the broadest index of the UK market – lost 3.3% today. Medium-sized companies (FTSE 250) suffered a 7.0% loss, following on from Friday’s 7.2% drop.

Larger companies (FTSE 100) lost 2.6%. Today we saw that banks and property-related stocks were hit particularly hard. So far this month the FTSE 250 is down 12.9% compared to 4.0% for the FTSE 100 which, if sustained, would be the largest monthly decline since October 2008; we have only held FTSE 100 in customer portfolios for some months now because of this Brexit risk. European stocks lost 2.9% and the US was down 1.8%.

The most noticeable performers today were UK government bonds, with the price of ten-year bonds rallying by 1.4% and the ten-year yield declining 0.15% to 0.93%, the lowest on record. Money markets are pricing in 80% chance of a cut in the base rate this year, which still seems too low to us. We expect a rate cut on 4 August with the possibility of another reduction later in the year.

The pound fell to below Friday’s lows, coming close to $1.31 today, a further 3% decline, and gold edged 0.3% higher.

Our defensive holdings in long-dated government bonds, gold and the US dollar continue to offset much of the decline in stock prices.

Source data: Bloomberg 

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DAY 1: Friday 25th June 2016

How the markets reacted

This update is correct as at market close on the 24th June 2016.

Investors hate uncertainty so, unsurprisingly, it has been a volatile day across all financial markets around the world.

The main UK market index, the FTSE 100 lost 3.1%, at one point being down 8.7%, in one of the index’s most volatile days in history.

The FTSE 250 declined by 7.2%. This index is made up of small and medium-sized UK companies which naturally have a much greater focus towards the UK economy. Here at Nutmeg, we sold all of our exposure to the FTSE 250 back in February, at least in part because of the risk of a Brexit vote. Given that the vast majority of housing-related stocks in the index fell by more than 20%, it’s clear signal investors are worrying that Brexit will result in a sharp fall for the property market.

Other markets also fared badly, with Europe and Japan losing 8.6% and 7.9% respectively. At the time of writing, the US market is down 2.6%.

The pound fell to as low as $1.32, from $1.50 when the polls closed, but is now down at $1.36 – an 8.6% decline.

Meanwhile, government bonds and gold performed very strongly, which has helped Nutmeg portfolio performance today following some changes we made recently.

The performance of Nutmeg portfolios today saw a maximum loss of -0.5% in some low risk portfolios and a maximum gain of around 1.6% in highest risk portfolios. Losses in equities were offset by large gains in bond holdings (for example long-dated government bonds returned almost 5% over the day), gold and the US dollar (for higher risk portfolios).

What now?

Financial markets are set for a period of volatility as investors seek to understand the impact of this big change in the geo-political landscape. Meanwhile, central banks are likely to join together to support economic growth and stabilise investor confidence.

Already the Bank of England has announced measures to the support UK banks should they need it, and we expect the Bank of England to cut the base rate, potentially to 0%, to support consumer and business confidence. This may come in a matter of days, or it could be months until we see a change.

As always, we will be managing Nutmeg client portfolios to ensure a good balance between potential returns and reasonable amounts of risk.  In the coming weeks we think there will be opportunities to find gains, but for now we are maintaining a risk-averse approach until the outlook becomes clearer.

Source data: Bloomberg

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Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance.

 

 

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Shaun Port

Shaun is the chief investment officer at Nutmeg. He has over 25 years’ experience developing and implementing investment strategies for clients ranging from central banks to pension schemes to charities and private individuals. Shaun holds a degree in Mathematical Economics from the University of Birmingham and is a Chartered Alternative Investment Analyst. He can be found tweeting @ShaunPort.


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