The FTSE 100 index like many other developed stock markets has had a turbulent ride this year. It started January at 6100 and fell to 5536 by mid-February after the fall in oil price and the devaluation of the renminbi only to rally to 6400 in mid-April. The FTSE 100 is heavily influenced by oil, energy and mining prices so as oil and commodity prices recovered so did the index.
Since April the markets have traded sideways until the impact of Brexit hit markets in mid-June. The FTSE 100 fell from 6340 to 6022 in the days after Britain voted to leave the EU. The next day fall of 3.5% was far less than expected and far less than other Eurozone stock markets. It has by 1st July recovered and grown to 6521 on the prospect of a deflated GB£, interest rate cuts and reduced corporation tax rates.
The UK economy grew by 0.4% in Q1 2016 down from 0.6% in Q4 2015 but in line with forecasts. Certainly economic momentum will slow in the wake of Brexit as it had been before with investment and development postponed. The Manufacturing Purchase Managers Index (PMI) fell below 50, the mark that separates expansion from contraction for the first time since March 2013, but has recovered to 52.1 in June. The construction PMI was above 50 but at a four year low.
There is some very good news about employment rates. The Office of National statistics (ONS) reported the UK has the lowest unemployment rate since October 2005. Unemployment is now 5% after 55,000 new jobs were created in Q1. The employment rate remains at 74.2% the joint highest level since records began in 1971.
The only down side of this news is that the number of new jobs created in Q1 was 55,000 as compared to 116,000 in Q4 2015. This reduction in the number of new jobs was evidence of the economy cooling.
Wages grew by 2.3% in the past twelve months with firms reporting higher labour costs due to the new national living wage. The weakness in £GBP and the recovery in oil, could also see inflation climb faster than expected.
The UK residential housing market continued to rise in value with house prices up on average 8.2% in the past year. Unsurprisingly, London prices climbed by 14.5%. The average UK property is now valued at £209,054. Some areas of the UK saw house price falls, this included Wales with a reduction of 1.9% taking the average house value to £139,445. The effects of Brexit on house prices are yet to come through. New builds will be effected by higher imported material costs due to the devaluation of GB£.
The great opportunity facing British business is the export opportunity available with a 12% reduction in GB£ values. British goods in foreign markets will now be very well priced. The challenge will be the impact of inflation from more expensive foreign goods due to currency devaluation. This provides an asset allocation call towards large cap UK multinationals, index linked gilts and corporate bonds.