FTSE 100 sprints to 10-week high

What fool said a vote for Brexit would trigger a stockmarket crash and economic armageddon? Well, some of the brightest minds in the Square Mile actually. In fact, it was pretty much accepted in the City that a 'Leave' vote would kill demand for equities, certainly in the short-term. It did, for 10 minutes on Friday morning. What's happened since is almost as shocking as the Brexit vote itself.

After an early wobble, the FTSE 100 resumed its phenomenal march higher, reaching a peak of 6,398 mid-morning. That took gains since Monday night to over 400 points and the blue-chip index to its best since 21 April. It's also less than 100 points from a 10-month high.

A speech by Bank of England governor Mark Carney scheduled for this afternoon will also seek to reassure markets further, which could underpin gains.

It's true, bombed-out stocks look dirt cheap, equity yields beat other asset classes hands down, we know central banks will prop up markets and investors are betting against any significant Brexit impact near-term. There's even an outside chance it may never happen.

Unfortunately, this is not a broad-based rally. Miners have done well, especially those with interests in gold like Fresnillo and Randgold Resources. Both are up around 30% since the Brexit vote. Defensive plays like drug giants Shire and GlaxoSmithKline, and utilities including National Grid and United Utilities are all up 8-10%.

Housebuilders and banks have seen some bargain-hunting, but not much as they have most to lose if the 'Leave' vote stands. It's telling that both Persimmon and Taylor Wimpey have seen a third of their value wiped out in the past week. Royal Bank of Scotland and Lloyds are stuck in intensive care, too.

What's more interesting, though, is the weightings of index constituents, because it tells us a lot about why this rally is actually led by relatively few stocks. Among those who've prospered since Brexit are many of the index's big-hitters, the companies which have most influence on direction of the FTSE 100.

British American Tobacco, up 10% since last Thursday, accounts for 4.8% of the index, Glaxo (up 9%) has a weighting of 4.3%, and BP (up 11%) 4.1%. Shell, with a weighting of 4.5%, is up 6% and worth over £20 a share for the first time in a year.

Crucially, even HSBC is contributing. The bank is the most influential blue-chip of all, with a weighting of 5.3%. It's up a few pence in the past week, far better than any of its rivals. Movements at the housebuilders and other banks have much less of an impact on the FTSE 100 index.

But there is still a lot of head-scratching at the strength of the rally given the myriad possible outcomes over the next few days, weeks, months and years. Indeed, UBS has just cut its year-end FTSE 100 target to 5,500, putting the index on just 12 times earnings, after slashing its UK GDP forecast for 2017 from 2.3% to 0.5%.  

However, it does admit there is likely to be some offset with the weak pound giving a boost to overseas earners. It also notes that, "given the current political backdrop in the UK, this could change quickly and we acknowledge upside risk, if the politics becomes clearer."

Plenty of analysis

There is currently plenty of analysis on the subject. Technical analyst and regular Interactive Investor contributor Alistair Strang told us on Monday: "should London better 6,297, it shall regain the moral high ground above 'blue' [chart trend line] and probably signal the markets think Brexit was probably not a bad thing."

This morning he wrote that the leading index was trading in a region where near-term growth above 6,361 points pointed to next stop 6,400. After that, and especially a close above 6,417, brings 6,908 into play.

I've been asked whether the market thinks Brexit might actually be a good thing for the country. A look at the FTSE 250 index, a far better barometer of the British economy than its high-profile rival, suggests not. Mid-caps are more domestic in nature and the 250 is still down almost 1,300 points, or 7% since last Thursday's close. Again, housebuilders, real estate and the challenger banks are major casualties.

However, another Interactive Investor regular David Buik answers forcefully in his latest blog:

"If Frankfurt, Paris or Dublin thinks they can usurp London's prowess, dream on! We, in this country, need to stop talking recession in fourth-quarter and get cracking to make this brave new dawn work. It is only four months ago that the Chancellor was extolling the virtues of the UK's economy. So Brexit is responsible for its total collapse? I am not buying that."

I hope he's right.

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