How Brexit moved markets: five essential charts explained
When the UK voted for Brexit the market didn’t like it. It fell sharply, but within days the FTSE 100 was back above its pre-Brexit levels. So, what should investors take away from the events of the last week?
4 July 2016
For some UK investors, waking up on 24 June was like the morning after a heavy night and having that sick feeling of “What did we do last night?”
The UK voted to leave the European Union and as predictable as a baby throwing its toys out of the pram, the market went into schism:
- Sterling had fallen sharply against its major trading currencies, down 7.5% against the US dollar, and 5.2% against the euro.
- In stockmarkets, Asian markets reacted negatively to the news, with the Japanese Nikkei 225 down 7.9%. The FTSE 100 opened down 7%
- 10 year gilt yields fell on the day to 1.08%.
But a week on, what are markets telling us? Is there light at the end of the tunnel or is it a train coming the other way?
The FTSE 100
Although the FTSE 100 is back above its pre-Brexit level, looks can be deceiving. The FTSE likely rallied as it became apparent that Brexit would probably lead to a further easing in central bank monetary policy.
Also, the FTSE 100 is not representative of the UK economy as the vast majority of listed companies are international and derive their revenues from overseas.
It is telling that financial stocks have been left behind in the rebound, while the FTSE 250, which is a better barometer of the UK economy, remains sharply lower.
Meanwhile, the MSCI All Countries World share index is still lower than where it was before Brexit, which suggests that investors are pricing in a risk of contagion.
FTSE 350 Real Estate
Perhaps the performance of the real estate sector tells us most about investors’ confidence in the outlook for the UK economy.
A large proportion of the country’s wealth – or sense of it – is tied to their homes. The real estate index was down around 15% from its pre-Brexit level on 30 June.
Along with the underperformance in financial stocks, the fall in the real estate index implies that investors are pricing in a hit to demand in the housing market as confidence wanes.
UK 10-year gilt yields
UK government bond yields hit their lowest level ever after the vote for Brexit, which prompted Standard and Poors’, a credit agency, to cut the UK’s credit rating.
This may appear to be confusing. Bond yields tend to go higher when credit ratings are cut as investors price in risk.
The fall in UK gilt yields suggests that investors are pricing in the prospect of further interest rate cuts by the Bank of England (BoE).
Gold is perceived as the ultimate safe haven. It has been rising all year, but jumped post Brexit.
While the knee-jerk reaction after the referendum can be put down to panic in the market, the longer-term trend suggests that investors see clouds, rather than clear skies, on the economic horizon.
Despite recovering from its post-Brexit lows, sterling remains sharply lower against both the US dollar and the euro.
The market could be pricing in a cut in interest rate by the BoE to help stabilise the UK economy as it comes to terms with Brexit.
Mind the gap
Financial markets will be schizophrenic for sometime, at least until the fallout of the Brexit vote becomes clear.
But remember, with interest rates at historic lows money saved in banks is losing value in real terms. So, trying to grow your investments being in the market appears to remain a better option than being out of the market in the longer term.
Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.