Please find below our Weekly Market Update for the week ending 22nd March 2019.
Global equities have reached their highest level since early October. One of the reasons being the Federal Reserve’s rhetoric about a slower pace of interest rate hikes. Bond markets however are suggesting that momentum in the global economy is fading slightly and inflation remains subdued.
Whilst most equity markets have risen this week, we make no apologies again for our focus staying with Brexit. What happens with Brexit will be a historic moment in UK history. Yet, the same may not be said about how equities respond. We get asked a lot about the impact Brexit will have on the markets? More pertinently, what impact will Brexit have on my portfolio?
In simple terms, if there is a no deal then Sterling is likely to experience a serious judder and fall in value. As we saw yesterday, this gives a boost to the FTSE 100 because the majority of stocks listed in this index earn their revenues abroad. A fall in value of the pound gives a boost to their balance sheets when money is brought back into the UK.
Yesterday was a case in point, the pound fell on the turn of events in Parliament and the FTSE 100 rose by nearly 1%. It would be too linear though just to link this rise to Sterling because global equities have continued to rise. The FTSE 100 should be seen more as a global index rather than an index indicative of sentiment in the UK. Conversely, the mid 250 index fell yesterday reflecting the uncertainty around the outcome of Brexit. UK smaller companies have felt the pain and have lagged the broader equity markets significantly.
Now if we end up with a compromised deal and Brexit does happen in the next few weeks, we would expect Sterling to strengthen and domestic stocks to rise sharply. The FTSE 100 would also likely rise on improved sentiment, but much depends on what is happening globally. Sectors like oil and financials have a strong representation in the FTSE 100 and have a significant influence on the price of the index. In recent weeks we have seen Sterling rise and the FTSE 100 rise, reinforcing it’s not just down to currencies.
The short extensions exercised by the EU may play out in different ways. If Theresa May’s deal goes ahead then it’s good news for equity markets. If not, then uncertainty will be heightened and there may be quite a bit of volatility. If we crash out, expect Sterling to plummet alongside purely UK focussed stocks accepting that most FTSE companies are internationally focussed and so less likely to suffer the same amount. The contrarian beneficiary, just like a few days after the referendum, could be the FTSE 100 but much depends on the sentiment globally.
By way if a sense of perspective, it is worth remembering that only circa 22% is invested in UK equities across our portfolios and it is a mixture of large cap, medium and smaller cap equities.
Have a great weekend