The performance of the FTSE 100 (INDEXFTSE: UKX) in the wake of last months Brexit vote has no doubt taken even the most optimistic stock market commentator by surprise.After some initial bumpiness, Britains blue chip index has strode resoundingly higher and struck 11-month highs around 6,700 points just this week.
This strength does have some logic. After all, the FTSE 100 is packed with companies whose massive international exposure minimises the possibly-negative implications of the leave vote.And of course many stocks with huge overseas operations also stand to gain from heavy sterling weakness in the months and possibly years ahead.
Pound perils
Indeed, demand for the UKs big-caps could carry on risingshould the pound continue to haemorrhage value as many experts are predicting.
Both HSBC and Goldman Sachs are convinced that sterling will plumb to 1.20 against the US dollar by the end of the year, worsening from the 31-year trough below 1.30 hit in recent days. And Deutsche Bank expects aslip to 1.15 in the months ahead.
Bank action
As well as reflecting fears concerning the domestic economy, the pound has also lost value as the market expects an imminent interest rate cut by the Bank of England.
However, this may not be the only round of action bank governor Mark Carney and the Monetary Policy Committee may have to take, with Nomuraexpecting another rate reduction in November.
On top of having further negative implications for the pound, the prospect of extra liquidity flooding into the system could bolster the FTSE 100 still further.
Withdrawal symptoms
The appointment of Theresa May as prime minister thereby truncatinga possible three-month wait for the next PM has also propelled the FTSE 100 recently, soothing the nerves of those fearing a prolonged British withdrawal from the EU.
Although a remain supporter prior to Junes vote, May has vowed since then to deliver Brexit.But this is unlikely to be the end of the matter. Indeed, other EU leaders are likely to try toplay hardball concerning access to the single market, a development that could still lead to huge delays inArticle 50 being triggered.
Meanwhile, the likelihood of last months referendum being upheld remains a bone of contention as calls for a Parliamentary vote on the matter circulate; lawmakers pore over the whether Brexit is constitutionally viable; and the government negotiates while trying to hurdle a severe economic shock and possible break-up of the UK.
In other news
The tetchy political landscape isnt the only factor that could send the FTSE 100 sinking again.As Ive long argued, the indexs huge weighting towards energy and mining leaves it in danger of a correction should supply and demand indicators continue to worsen.
For one, the stream of disappointing economic data from China is unlikely to end soon, pilingfurther pressure oncommodities suppliers.
On top of this, Britains blue chips arent completely immune to the prospect of a domestic recession. Banks like Barclays and Lloyds still deal at a significant discount to their pre-referendum levels, while housebuilders such as Persimmon have also fallen thanks to their dependence on a healthy British economy.
Given this broad range of factors, I believe its nigh-on impossible to confidently guess where the FTSE 100 will be moving to in the weeks and months ahead.
Be brave!
Indeed, times of huge political macroeconomic uncertainty like these mean that picking the ‘right’ stock can be more difficult than usual.
But this isn’t to say investors should withdrawinto their shells, as there’s still plenty of scope for shrewd stock pickers to make a fortune.And this is where The Motley Fool can help.
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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Barclays and HSBC Holdings. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
