It is now over a week since the historic vote for Britain to leave the EU and stock prices continue to be relatively volatile. It is interesting to see how investors have reacted to the result - the market is up, surprising many after the initial reactions to the result, although we have seen a pronounced polarisation of share price movements depending on the size and nature of businesses.
The FTSE 100 has broken through the 6,500 level for the first time since August last year and, as at the time of writing, has risen just under 3% since the close of business on 23rd June (the day of the vote). In comparison, the FTSE 250 has fallen approximately 7% over this same period. The outperformance of many of the larger companies that make up the FTSE 100 has largely been driven by their international nature. Unilever, for example, derives over 90% of its profits overseas but has a large cost base in the UK – it is therefore a strong relative winner from the post-vote sterling weakness.
Share prices of UK-focussed businesses, on the other hand, have been very weak and are to some extent pricing in the probability of a recession. Clearly, companies with earnings predominantly or entirely derived in the UK are more exposed to any slowing of the domestic economy and will also suffer from any increase in the cost of imported goods that arises from sterling weakness.
Volatility is likely to continue for some time until the implications of the vote become clearer. For long-term investors, volatility is a positive insofar as it can throw up interesting opportunities to buy good quality businesses at attractive prices. The challenge for investors looking at UK-focused businesses is in determining whether current prices are attractive compared to the likelihood or otherwise of a Brexit-induced UK recession.
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