Despite the uncertainties created by Brexit, the past month has contained some encouraging features. On the back of better than expected data, the US equity market soared into new high ground. Here in Britain, instead of waiting two months before forming a Government, the Conservative party wasted no time in electing Theresa May as leader and Prime Minister, and she quickly formed a new Government. It remains to be seen what sort of Brexit deal she can negotiate with the EU, but she has made an assured start, steading the ship and helping markets. The FTSE-100 index rose from 5,982 on 27 June, broke through the strong resistance at 6,400 and crested 6,700. The companies in this index derive most of their earnings overseas, or report in dollars, thus benefiting from the fall in sterling. The more domestically-based FTSE-250 index recovered some of its Brexit falls, but housebuilders, commercial property (including REITs) and most financials continue to show heavy losses. The gilt market remained strong, the yield on the 10-year gilt falling to a new all-time low of 0.8%.
Technically, the FTSE-100 index has completed a reverse ‘head and shoulders’ pattern. This ‘predicts’ a rise to around 7,100, with the old resistance level (6,400), becoming the support level. This seems at odds with the huge uncertainties which persist, but perhaps it reflects the search for income in a world of Government bonds yielding little or nothing. It may even foreshadow that the world economy is about to pick up speed, as indicated by improving metal prices. Mostly, it probably shows increasing confidence that the economy will not go into recession, despite slowing down. The Bank of England is ready to inject £250 billion into the economy if needed, and may cut 0.25% off base rates next month.
The Japanese £24 billion cash bid for ARM Holdings (one of our core holdings) at a 40% premium suggests that foreign investment in Britain has not dried up, and several big residential property sales (to foreign buyers) have emphasised this point. However, we are seeing, and expect further softening in the commercial property market. Several property funds have suspended withdrawals and applied ‘fair market price’ reductions.
With thanks to Balkerne Asset Management for their latest investment summary.