UK shares soared last Monday after polls showed the “Remain” camp taking a lead just days before the EU referendum. The FTSE 100 jumped by over 3% with financial stocks such as Hargreaves Lansdown and Lloyds reaping the benefits, as well as housing stocks including Taylor Wimpey and Barratt Developments. Some of these stocks had taken a pounding when the Leave camp had been stretching their lead in the polls. The FTSE 100 closed up over 3% and the pound also saw its best session since 2008, jumping over 2% against the US dollar to $1.47.
Tuesday saw another positive day as momentum continued ahead of Thursday’s vote, although the pound fell after another poll showed “Leave” edging ahead once again. Traders seemed to shrug off the news, however, and the FTSE 100 closed up marginally. In corporate news, Whitbread reported an improved sales number in the first quarter due to its Costa Coffee chain performing well. BHP Billiton announced it was aiming to cut another $600m in coal production costs by the end of the 2017 financial year.
Wednesday saw a final big push on markets ahead of the referendum, with hope and optimism helping drive financial stocks and miners up, pushing the benchmark FTSE 100 Index up by just over 0.5%. The optimism continued through Thursday as the voting in the EU referendum got under way, and the market had another strong day, rising over 1%. Royal Dutch Shell and Anglo American were among the biggest risers on the day. But AstraZeneca was slightly higher too after it relayed a decision about its FluMist influenza vaccine that is not going to be used this winter.
As the result of the vote became clear on Friday morning, however, the FTSE 100 fell by nearly 7% in early trading and the pound fell to 30-year lows against the dollar. By 10am, the FTSE 100 had recovered some ground, and was 4.20% down compared to Thursday’s close. But, encouragingly, the index was still higher compared to the start of the week, thanks to some strong performances in the run up to Thursday’s vote. The pound, however, was still languishing, down nearly 10% against the US dollar, around 6.55% against the euro and down 6.5% compared to the Australian dollar.
Company focus: Whitbread
The hotel-to-coffee shop-to-restaurant group released a good trading update for the first quarter. A continued (expected) weak performance of Premier Inn was offset by better than expected trading at Costa, which benefitted from the diversification of its offer away from the high street and into other concession channels – such as self-service machines in Tesco stores. The UK hotel market over the past year has been weak. Previous years of a continued supply/demand imbalance allowed for strong pricing power and revenue growth. Supply has caught up with demand faster than expected due to a softer consumer environment and lower inbound tourism, particularly to London. As we’ve seen across the London hotel market, pricing performance has been weak in the aftermath of the terrorist attacks across Europe in the past year.
That said, group sales growth continues to impress thanks to the sustained roll-out programme of both Premier Inn and Costa. Total sales were up 8% year-on-year. While sentiment on the shares has been dampened over the last year as the halo of rapid and hugely profitable expansion fades, there is a highly cash generative underlying business model in place. This will give Whitbread the ability to throw off a significant amount of cash to shareholders should and when the estate expansion, and the capital this needs, slow.
The momentous decision by the UK to vote to leave the European Union, popularly known as Brexit, is a step into the unknown. At this stage the longer-term consequences for the markets, economy and British and European politics are difficult to predict. The country is likely to enter a long period of negotiation around the terms of the exit.
In the shorter term we can expect share, bond and currency markets to be extremely volatile – not just in the UK but globally. In the days leading up to the referendum, sterling and global stock markets strengthened in the mistaken belief that the UK would opt to remain in the EU. Now, as markets readjust to the new reality we can expect extreme turbulence in financial markets.
We know this might be a cause of concern for clients, though it is important to recognise that the volatility will not last and markets will find their feet again. In the meantime, our investment portfolios are well placed to weather the short-term volatility. We will also be seeking out opportunities thrown up by the turbulence and will be quick to react when growth opportunities emerge.
UK government borrowing was higher than predicted in May according to the Office for National Statistics (ONS). Public sector net borrowing, excluding taxpayer-backed banks, was £9.7bn, higher than the £9.5bn forecast by economists. The figure follows from an April estimate that was revised upwards, from an initial forecast of £7.2bn to £8.2bn – a potentially worrying start to the year for Chancellor George Osborne after borrowing targets were missed last year.
Manufacturing in the UK continued to show signs of stability according to the latest CBI Industrial Trends survey. The order book balance rose to -2 in the three months to June, up from -8 in May and maintaining a trend of better figures since a February low of -17. The survey of 482 manufacturers reported that total order books strength was led by the food and drink sector, and motor vehicles & transport. Output orders in particular gave manufacturers reason to cheer: 30% of businesses reported a rise in output volumes, and 19% a decrease, giving a balance of +11%. “While British manufacturers had a tricky start to the year, there are more positive signs as output and demand stabilise,” said Rain Newton-Smith, CBI Chief Economist.
Eurozone consumer confidence unexpectedly dipped in June, falling to -7.3 from -7 in May. While economists had been expecting no change, the mood may have been affected by the EU referendum and the knock-on effect that a Brexit may have across the region. The survey is reported by the European Commission and measures the level of optimism that people in the euro area have about the economy – focusing on the current economic and financial situation as well as on expected developments.
Meanwhile, the economic mood seemed to be more positive in the US, reflected in the buoyant state of the US housing market. According to the National Association of Realtors, sales of existing single-family homes climbed by 1.8% month-on-month, an annualised rate of 5.53m and the best level since February 2007. While sales of new homes in the US slipped 6% in May from April, the pace was still the second best for a month since the recession ended. Sales were up 551,000 in May said the Commerce Department, following on from a soaring 12.3% rise the previous month.
Company announcements that caught our attention this week
Key company diary dates
Economic highlights over the next week
Best & worst performing sectors (rel. to FTSE 350)*
Best & worst performing stocks*
* Weekly movements up until close of business Thursday.
Main source of information: Company Report and Accounts, Bloomberg
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