Interactive Investor

FTSE 100 stages incredible fightback

28th June 2016 13:29

Lee Wild from interactive investor

Apparently in support of the 52% that voted 'Leave' last Thursday, England's footballers decided to exit Europe too last night following an abject display against plucky Iceland. Fans will hope that the team can pick itself up as quickly as financial markets, which have rallied Tuesday following a savage two-day Brexit rout.  

Admittedly, after heavy losses, shares look cheap on paper. There's also the very real likelihood of interest rate cuts soon, and belief that Bank of England governor Mark Carney will unleash a third wave of quantitative easing if things get really bad.

However, this triple-digit rally is quite remarkable given no one has any accurate idea what's going to happen in this post-Brexit world in the next 10 minutes let alone a couple of months or few years' time.

The true impact of the 'Leave' vote on company profits remains a great unknown. Dividend forecasts are being scaled back, too, and there's a sense that prices could go lower before we see sustainable, broad-based buying.

What is certain is that markets will remain super-volatile for some time, driven by events in Westminster and Brussels. Who wouldn't want to be a fly on the wall when David Cameron meets EU leaders at a two-day summit beginning in Brussels today? Jeremy Corbyn could also find his position untenable Tuesday as party MPs vote on a motion of no confidence in the Labour leader.

Losing 350 points since polling day, the FTSE 100 was up 151 points Tuesday at 6,133.  Stocks hit hard on the way down are in demand again, with insurers leading the pack.

Legal & General celebrated naming Sir John Kingman as its new chairman with an 8% jump. It seems particularly astute given Sir John, who looked after the government's holdings in Lloyds, Royal Bank of Scotland and Northern Rock, helped steer the government through the Credit Crunch.

"John's grasp of complex financial markets was a hallmark of the UK government's successful handling of the 2008-9 financial crisis," said L&G's interim chairman Rudy Markham. "This, plus his commitment to growth in the UK economy, will stand him in good stead at Legal & General as the UK navigates Brexit."

L&G, down as much as 32% since the referendum result, timed the announcement to coincide with a reassuring trading statement. Bargain hunters also helped Prudential rally 10% and Aviva, which lost as much as 35% in the aftermath of Brexit, is up over 6%.

According to market data website Sharepad, the insurers now trade on single-digit forward earnings multiples. Lloyds and Barclays, both up sharply, do too.

Predictably, housebuilders Berkeley Group, Barratt Developments, Taylor Wimpey and Persimmon now trade on the lowest valuation multiples in years. Share prices are up Tuesday, however, after Redrow soothed fears about a housing market crash. They were queuing round the block at new sites launched last weekend, it said. It remains to be seen whether or not this is a value trap.

High street clothes chain Next is back in fashion all of a sudden too. A warning from chairman Lord Wolfson in March that this year would be "the toughest we have faced since 2008," looks guaranteed. Already down from over 8,000p in December to below 5,000p last month, the shares are up 10% to over 4,800p. On Friday they'd plummeted close to 3,500p.

At the other end of the scale, only a handful of companies lost ground Tuesday, among them Randgold Resources as investors bank profits. The 'safe-haven' shares have risen as much as 28% since Thursday to new highs, and are still up 89% in 2016.

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.