The new Prime Minster, Theresa May, has said that she doesn’t expect Article 50 to be invoked in 2016, extending the uncertainty regarding what the negotiations will be and when they will take place. In the Labour Party, Jeremy Corbyn is hanging on to the leadership despite the continued pressure for him to resign and the challenge from Owen Smith.
In the meantime, European politics relaxed slightly after the Spanish election which saw an increase in traditional party support. A couple of opinion polls actually showed an increase in EU support in some countries, e.g. Denmark. The market is focusing its attention on the Italian referendum in October and the problems currently surrounding the Italian Banks. There is still clearly a lot of stress in the markets given the uncertainty and we are wary of market volatility.
Equity markets continue to be volatile. The FTSE 100 Index is trading above the 6,500 level, at highs not seen for years. However, there are deep differences with the constituent performance within the index with financial institutions and house-builders particularly being hard hit following the Brexit vote.
Mining and Healthcare stocks have been the standout positive performers as they generally have a higher proportion of non-sterling revenue. There is a substantial difference in the performance between large and mid-cap stocks in the UK, with the FTSE 100 Index up 3% since before the Brexit vote, and the FTSE 250 Index down 7% over the same period.
Bond prices have continued to increase as a flight to safety and yields continue to fall. US 10 year yields went below 1.40% for the first time ever while Gilts 10 year yields are now below 0.8%. Negative yields continue across eurozone bonds, with German 10 year bond yields at -0.17%. The amount of negative yielding debt worldwide increased to $11.7bn. Safe haven bonds are in demand. Expectations of a recession has led markets to believe that central bank action will be to keep rates lower for longer to encourage growth.
Sterling was the barometer of risk in the EU referendum debate, and continues to be so. It is now down below the 1.31 level against the dollar, a post-Brexit low, and the lowest since 1985. BoE governor, Mark Carney, suggested that there will be a rate cut and monetary easing over the summer, putting pressure on the pound. On 5th July, he announced easing of capital requirements for banks to help encourage lending. The pound also fell due to concerns over the UK property sector. The Euro is worth watching given the stress on the banking system. It has recovered slightly against the dollar and is now at its strongest value versus the pound since 2013.
We are seeing significant moves in the UK Property Sector with some of the major UK property listed equities losing between 30-40% of their value since the EU Referendum. The stress in the UK Property market is having a major impact on the open-ended property funds. At the time of writing, we have seen a number of high profile funds suspend redemptions, for example, Standard Life, Aviva, M&G etc.
UK Property funds had already seen substantial write-downs since the Brexit vote; however the suspension of redemptions shows a real lack of liquidity in these funds. It poses a severe risk for all property funds and we may see more funds follow this course of action. The outlook for UK Property following Brexit seems bleak at present.
Commodities have had a strong run as part of the move to safe haven assets. Gold went above $1,350 per ounce, up 7% since Brexit and up 27% on the year. Silver has seen an even stronger rally, up 42% on the year, and up 14% since 23rd June, trading around the $20 per ounce mark, the highest level since 2014. The price of other precious metals, such as Palladium and Platinum, have also increased significantly post-Brexit. The Oil price has not really been impacted by Brexit.
In summary overall there is still inherent volatility in the various sectors above but the two impacted most have been currency and property. It is clear that there is still a move towards safe haven assets and increased market volatility as a result of the EU Referendum. A flexible active investment portfolio will have likely benefited most over the period and we continue to monitor matters very closely.