Interactive Investor

Who's driving incredible FTSE 100 rally?

20th June 2016 13:33

Lee Wild from interactive investor

A week ago we were all preparing to wave goodbye to the European Union (EU). Opinion polls swung in favour of Brexit, making a 'Leave' vote far more likely than not. However, since the tragic death of MP Jo Cox and subsequent suspension of referendum campaigning, and with the backing of national newspapers, a majority of us would now vote 'Remain'.

Just days after the latest Ipsos Mori poll for the Evening Standard gave 'Leave' a six-point lead, a Survation poll in the Daily Mail has just shown a complete reversal from last week's 45-42% in favour of 'Leave' to 45-42% backing 'Remain'.

Interestingly, a ComRes poll for the Sunday Mirror showed a clear shift in opinion after the murder of Jo Cox. The percentage of voters who would be "delighted" to leave the EU slumped from 45% before her death to 38% after. Bookie Betfair now puts the chances of a 'Remain' vote at 73%.

The Times this weekend echoed my thoughts expressed a fortnight ago that it's "easier to drive change from within" the EU. "Britain would be better off leading a renewed drive for reform within the EU rather than starting afresh outside it," they said.

Editors at the Daily Mail and Observer also backed 'Remain', while the Telegraph, predictably, told readers it was firmly in the 'Leave' camp.

This apparent volte-face among voters, even if only temporary, does at least give us some idea of how much a 'Remain' vote would benefit the FTSE 100.

Monday lunchtime, the blue-chip index was up 197 points at 6,217, an 11-day high. On Thursday, the index plunged as low as 5,899, its worst level since 25 February. So, greater enthusiasm for continuing the EU experiment has so far been worth 318 points, or 5.4%.

Of course, if we end up staying, the relief rally will be substantially more, perhaps enough to take us past 2016 highs at 6,427, and even the 6,487 registered last October. Beat that and we're back near pre-August crash prices. Enjoy it before the other big issues of the day - the US economy, lacklustre company earnings growth and China - drive sentiment instead.

Conversely, the FTSE 100 plunged 400 points, or 6.3%, between 9 June and last Thursday, and 330 points after a survey for The Independent on 10 June gave 'Leave' a 10-point lead. A Brexit would certainly threaten a four-year low at 5,499.

Royal Bank of Scotland, Lloyds and Barclays are all up at least 6% Monday. So are housebuilders Taylor Wimpey and Barratt Developments. These are the companies deemed most at risk from a Brexit vote on Thursday.

Only this morning, broker Jefferies warned that RBS and Barclays were the banks most at risk from a 'Leave' vote. "In our view, a Brexit scenario would give rise to a 5-10% decline in the FTSE banks index," wrote banks analyst Joe Dickerson.

"Currently on 0.62x price/book, UK banks are, inter alia, trading at a 60% discount to their 15-year average. We would expect investment banking and corporate banking franchises (BARC, RBS) to be impacted the most."

But a 'Leave' results could be much worse for the housebuilders. They've been at the forefront of the Brexit debate and risk trade, so relief that this nightmare might be avoided is perhaps an understatement.

"Creating a sensitivity analysis to a Brexit-led economic slowdown, we model a 20% fall in asset values and the sector to trade at or around net book value," says Jefferies' Anthony Codling. "The average anticipated share price fall is 44% with Persimmon falling the most at 62% and Bovis the least at 25%."

There are big gains for insurers Aviva, Old Mutual and Standard Life, too. A slowdown in UK business growth in the event of Brexit risks pension schemes delaying bulk annuity purchases, argues Jefferies, while slower market flows could impact asset growth and real estate market falls could reduce protection sales.

They also fear widening corporate bond spreads which could lower solvency ratios, while lower for longer interest rates would hit reinvestment yields and profitability.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.