Defying Expectations

June 2016
stock market price display (

The effects of the UK vote to leave the European Union (EU) were immediately evident in markets.  The FTSE 100 index fell 3% on Friday and a further 2.5% on Monday.  Sterling had fallen 11% against the US dollar on Monday.  However by the close of business on Wednesday the FTSE 100 had recovered to pre-referendum levels though sterling remains 9% down against the US dollar.  International economic agencies had predicted that a leave result would shock the global economy, but it will take months before we really see the full impact of the outcome in markets.

The initial mood was to decrease risk; investors moved out of equities and into sovereign bonds. Selling has been concentrated in housebuilders and banks as investors moved away from cyclical stocks and into more defensive names*.  We had anticipated this shift and already repositioned our UK exposure into larger-capitalised names and away from the smaller, more UK domestically-focused companies.

Over the weekend it looked like the turmoil in the UK would have implications in the re-run of the Spanish General Election.  Against the polls the largest party (the conservative Popular Party) increased its share of the vote but still failed to return an overall majority.  However, a larger share of the vote increases the likelihood of a coalition.  The markets received the news well and we saw the cost of Spanish government borrowing fall.  We now turn our attention to the Italian constitutional referendum in October which we see as the next disruptor to the European project.

We have always taken the view that the UK’s referendum on its membership with the EU was an event which could create investment opportunities for us.  As the political outlook takes shape, longer-term opportunities will become clearer.

*Cyclical vs Defensive equities

Cyclical equities

Shares in companies that are more affected by changes in the macroeconomic environment.  By example, companies that produce or distribute goods and services which consumers cut back on when money is tight: fine dining and holidays.

Defensive equities

Shares in companies that are less affected by the macroeconomic environment because they produce or distribute goods and services we always need: food, power, water and gas.