When the FTSE 100 crashed below 6,000 straightafter theEUreferendum shock, few would have expected it to be flying so high just six months later. But here we are, going into Christmas, with the benchmark index above 7,000, a few festive high jinks away from its all-time high.
A right pounding
The Brexit shock didnt last long. Investors quickly realised there was a bright side, which was that sterling was crashing at an even faster pace. On 22 June, when Britons went to bed expecting most of us to voteRemainon June 23, the pound topped out at around $1.49 and 1.30. By mid-October, it hadslumped as low as $1.21 and 1.10, a peak-to-trough drop of almost 19% and 15% respectively.
This was good news for the FTSE 100 because companies listed on the index generate more than three-quarters of their revenuesoverseas, and the value of these earnings had soaredonce converted back into sterling. Better still, their exportswere cheaper for foreigners to buy, which should also liftsales.
There was a further boost for investors, because an astonishing 47 FTSE 100 companies pay dividends in dollars,which makes those payoutsmore valuable in sterling terms. Some, notably Unilever, pay in euros. Also, companies with large foreign earnings need to use less of them to maintain their dividend. Theres adownside to the weaker pound in that imported raw materials will become more expensive, pushing up company costs in sterling terms.
Theres anotherreason the FTSE 100 has done so well. Step forward US President-elect Donald Trump, whose much-hyped $1trn reflation blitzhas given markets an extra lift, even though its far from set in stone.
Pound to rebound
This is one of the benefits of having a free-floating currency, which can helpto act as a shock absorber, even one as big as Brexit. The pound has done its work, and is now taking a breather. Sterling is starting to recover, and currently trades at $1.24 and 1.19. This is well below its pre-Brexit highs but is a marked improvement, especially against the single currency.
There may be more to come in 2017, with Bloombergrecently naming the pound as one of three global currencies to watchnext year, along with the Norwegian krone and South African rand. It says technical charts and supportive cross-asset themes signal sterlingsrecent momentum may continue.
Hard facts of life
Making predictions is always dangerous, especially about future currency movements. Much will depend on how markets react when Article 50 is triggered, presumably by the end of March, and whether negotiations progress in a cordial manner, or descend into acrimony.
Hard Brexit will hurt the pound, soft Brexit will help it, at least in the short run. When Theresa May made her Brexit means Brexitstatement the pound slumped, but recoveredafter the Supreme Court gave Parliament asay, and Ministers started talking about transitional arrangements.
For now, the pound seems to have found its floor. In technicalterms, its undervalued, but markets also have to price-in wholly unknowable political risk. The poundhas done sterling work this year but we cant rely on it repeating the trick in 2017.
The doom-mongers said Brexit would be a disaster for the UK, but the economy is still growing and the FTSE 100 is flying.
Still, it’s early daysand the turbulence may return with a vengeance once Prime Minister Theresa May triggers Article 50.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.