You, like me, have probably had enough of reports on the likely negative consequences of Brexit.  However, there are reasons to feel positive. Mr Osborne had warned that there would need to be an emergency budget; the UK economy would shrink; pensioners would suffer; the UK debt would be downgraded. However, not much was said about the stock market and even less about the bond market. But let’s take a look at the good things that have happened for you investors in the last few weeks. The indicators below suggest there are things to be happy about.

Index or Currency Pair	23-Jun-16	28-Jul-16	% change
FTSE 100	6338	6742	6.37%
GBP/USD	1.4797	1.3174	-10.97%
GBP/EUR	1.3015	1.187	-8.80%
10yr Gilt price	105.52%	111.18%	5.36%
10yr Gilt yield	1.36%	0.73%	-46.35%
S&P 500	2113.32	2166	2.49%
Euro Stoxx 50	3037.86	2989	-1.61%

 

Imagine you have a balanced portfolio of bonds of short to medium maturity and equities invested in large companies (i.e. predominantly FTSE 100 shares as many of the most popular funds are), you will not have done badly.

• The FTSE 100 has risen because most of its component companies have large international operations and benefit from sterling weakness.
• The Euro and US$ denominated assets are suddenly worth a lot more in sterling terms. Euros and US$ repatriated to the UK produce more sterling.
• Gilt prices have risen. Thus the capital values are higher, which will be reflected in the value of the bonds in the portfolio. Remember, however, that higher gilt prices mean lower interest rates and lower yields. Obviously lower rates for borrowers reduce interest costs both for companies and individuals seeking mortgage loans. Lower interest expense has a direct positive impact on profit and loss accounts for companies.
• The S&P 500 is up for investors holding US$-denominated funds to add to the currency gains.
• Even though the Euro Stoxx 50 (the index of the 50 largest companies in Europe) is down, the fall in sterling against the Euro more than compensates any losses on the index. (It is important to note here that this assumes that you are invested in line with the index or are in a Euro Stoxx 50 tracker fund; it does not apply to all European equity funds.)

It is not all bad, is it? The market has been reassured by the Bank of England saying that they would provide up to £250bln liquidity in the event that it was necessary. This has undoubtedly helped the stock market in the same way that it did when Europe had its own crisis and Mr Draghi said he would do ‘whatever it takes’ to support the European economies with his bond-buying programme.

Clearly we must not get overexcited as matters can change just as rapidly (watch out for a Greek repayment on its European debt and the Italian banks, which are said to be weak), but since 23 June you as investors have reasons to be cheerful.

Archiemidas

 

This article is not to be construed as financial advice. The views expressed above are those of the writer alone and do not constitute a recommendation to purchase, hold or sell. It must be borne in mind that the value of investments and any income will fluctuate.  The value of your Investment can fall as well as rise and you may not get back the original amount invested. Past performance is not a guide to future returns.