With the UK voting for Brexit, a change of UK Prime Minister, the opposition in disarray – it was never meant to be a time for the stock market to soar was it?
Below, we take a look at what the drivers behind the market’s surge have been, and assess what this means for investors.
After first topping 7,000 points in March 2015, the FTSE is not entering uncharted waters. However, by breaking through the barrier at quite a rate of knots, the index is definitely making waves. Since closing below 6,000 on 27 June, it has taken only 99 days to reach 7,000.
The gains in the FTSE 100 can be partly explained by a sharp fall in sterling, which is now at a 31-year low against the dollar. The lower pound equates to a boost to earnings for companies with significant overseas business.
Once the dust had settled after the Brexit vote, investors realised that companies that do their business overseas, such as would be largely isolated from any negative impact on the UK, and their overseas earnings could be converted back to sterling at a preferable rate. This drove profit forecasts up overnight.
In addition to the currency benefit, many of the UK’s biggest mining and oil & gas companies have received a further fillip from favourable developments in their markets. The oil & gas sector rose as OPEC confirmed that it is to reintroduce production caps, while the miners have benefited from a broad uptick in commodity prices. With these sectors making up 20% of the FTSE 100, the recent performance of the natural resources giants, has delivered a significant boost.
Lower interest rates
The second boost to the FTSE has been the cut in interest rates. The monetary policy committee unanimously voted to cut rates to 0.25% on 3 August 2016. A lower interest rate is designed to stimulate the economy by lowering borrowing costs for households and businesses. While banking may feel the squeeze of tighter net interest margins, this cut, together with the Bank’s extension of the quantitative easing plan, was a further boost to asset prices across the board, and shares proved no exception.
An improved outlook
Recent UK growth figures have been ahead of expectations. Figures released on 30 September suggest the services sector has shrugged off fears of a post-Brexit slump, and expanded by 0.4% in July, exceeding pre-Brexit rates of growth. With the OECD also revising forecasts upwards, the outlook for the UK looks brighter. As confidence has improved, many of the UK’s more domestically focused stocks have joined in the post-Brexit rebound.
Where does it leave investors?
The FTSE 100 was launched at 1,000 points on 3 January 1984. Passing 7,000 therefore means the value of the UK’s one hundred largest companies is now seven times the value of the largest hundred 32 years ago. This rise serves as a timely reminder of the importance of a long-term approach to investing.
However, passing 7,000 is only really a psychological barrier for investors. For the computer that calculates the FTSE’s level, 7,000 is just another number.
On the current state of play, with interest rates set to stay low, we continue to believe that equities are an attractive option for investors with a longer-term horizon. Although uncertainty around the UK and wider markets remains, and investors are unlikely to see linear growth, recent events have again demonstrated the stock market’s resilience. It’s worth remembering that generally speaking, time in the markets is preferable to timing the markets.
At Investment Solutions, we are committed to helping our clients make considered, well-informed investment decisions, whether you are just starting out or are an experienced investor. We offer extensive expert research on many of the most widely held funds in the UK.
The information in this article is not intended to be advice or a recommendation. No view is given as to the present or future value or price of any investment or currency, and investors should form their own view in relation to any proposed investment. Investments can fall as well as rise in value so you could get back less than you invest. Past performance should not be seen as a guide to future returns.