We at The Armchair Trader continue to marvel at the way the mainstream media and spokespeople for the UK political parties continue to fixate on the performance of the FTSE 100 in the post-Brexit vote chaos. While the FTSE 250 actually represents a better measure of the UK stock market, it is its senior cousin that most pundits point to as evidence that the UK will pull through this in fine fettle.
On top of this, many traders have been complaining that banking, financial, mining and house building stocks have been getting hammered, yet still the index keeps rising. Mike van Dulken, Head of Research at Accendo Markets, rightly points out that it is safe haven and non-cyclical defensive stocks which are really driving the FTSE upwards.
Companies in sectors like healthcare, beverages, tobacco and telecoms are amongst those favoured because there will continue to be demand for them regardless of where the economy goes. Consumers will still need food and cigarettes, they will still need to pay for electricity and water. It is companies that rely on spending or credit for their profit line, namely house builders and banks, as well as other financial firms, that stand to get punished.
Van Dulken rightly points out that there is 43% of the FTSE composed of non-cyclical or defensive stocks. Many traders and investors have simply been shifting their allocations into these.
There are continuing fears about the prospects for the UK construction and property sectors, including the commercial property market – the massive redemptions some of the biggest UK property funds have been seeing in recent weeks are a good expression of the negative sentiment large investors are feeling about UK real estate.
Ipek Ozkardeskaya at LCG is warning traders to keep their wits about them when it comes to the UK equity market: for starters, she thinks activity in the UK gilts market evinces a 75% chance that the Bank of England will cut rates before the end of the year, with UK rates already at an historical low of 0.5%. This will, of course, lower profit margins for UK corporates.
“On the other hand, UK banks will also bump into regulatory and compliance issues, which could also generate additional costs in the next couple of quarters and weigh on banking sector profitability,” she says.
UK equity markets are simply looking too jittery for any long term trends to develop. While intraday traders could benefit from some of these high swings in volatility, those seeking longer term trends might be better off in other markets.