Market Insight - August 2016
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After Brexit

Brecovery?
The FTSE 100 has surged past its post- Brexit fall but it masks the UK’s real losses.

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The day after the referendum the FTSE 100 suffered its largest one-day loss since the financial crisis in 2008, and it’s second worst loss on record, falling by 8 per cent. But, less than 3 weeks later as Theresa May became the new Prime Minister, the FTSE was 9 per cent higher than its close value on the day after the referendum.

So does this mean that fears about the lasting damage a vote to leave could have on the stock markets were misguided? Not quite. The FTSE 100 recovery does not show the full picture of the market reaction to Brexit. This is because although the listed companies that make up the index have their shares traded on the London Stock Exchange, they make their money internationally.

It is estimated that the companies in the index earn over three quarters of their revenue in foreign currencies. This is then converted into Sterling for reporting purposes on the stock exchange. As the pound sterling has weakened significantly since the referendum, those companies get an additional boost during conversion.

The FTSE 250, which contains the next 250 biggest UK listed companies outside the top in the FTSE 100, is more domestically focused and is a better indicator of how the UK economy is viewed by the market. It is estimated that only around a third of the money made by the companies in this index is generated internationally. On the day after the vote, the FTSE 250 saw its worse ever fall since the index began, falling by 12 per cent.

For housing particularly, another stock market index, the FTSE 350 Household Goods & Construction index, a subset dominated by the largest housebuilders, provides a better barometer of the short-term market reaction to the vote. This fell by 10 per cent the day after the vote.

Both indexes have since made back some of those losses but by mid-July were still 3 and 5 per cent respectively lower than there were on the day of the referendum. With a new government now in place, the reduced uncertainty should help to further stabilise the markets but we’re not out of the woods yet.

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