Why Is FTSE 100 High After Brexit

Why Is FTSE 100 High After Brexit?

We have been asked by many clients why has the FTSE 100 index bounced back up after the initial Brexit shock?

As you know, we are sceptical about the current market bubble and do expect a significant economic slowdown. In addition, the Federal Reserve of the US is facing increasing pressure to increase interest rates to take the heat out of their economy with inflation pressure also building. With both a US Presidential election and potential interest rate increases, we expect markets to take a hit.

It is unprecedented that dividend payments from UK companies are falling ever further behind global dividend yields yet our market for the biggest 100 companies is high. This is because most of our larger companies do most of their trade outside of the European Union and earn their profits in US dollars. Given that the pound is weak at present against most currencies including the dollar it means that the larger British companies listed in the FTSE 100 index have artificially higher profits.

This position will not remain. It is a topsy-turvy world at the moment where if the US increases interest rates, the dollar will strengthen further meaning yet more profits for global companies but an increase in interest rates will also impact on US corporate borrowing costs to reduce profits. This will drive US markets down and given that UK stock markets are closely linked to US markets, there will be a downward impact in the UK too.

This is why we are reluctant to buy back into US, UK and EU markets at the current time. Markets are simply overvalued and you should never buy when prices are high, you should buy low sell high.