Brexit? What Brexit?

Many investors can hardly believe that the FTSE 100 is now above where it was pre-Brexit, and a major reversal has been seen in most markets globally.

London
Source: Bloomberg

The FTSE 100 is noticeably outperforming the FTSE 250 given that it is dominated by globally diversified firms many of whom see over 80% of their revenue generated from non-UK sources, and thus the dramatic selloff in the pound is actually a net positive in terms of the FX conversion of their overseas earnings. But in US dollar terms the FTSE 100 is still down 8.7% from its high on Thursday, which is how most global asset managers would be looking at it. So it would be premature to say that Brexit concerns have totally dissipated from markets, and certainly listening to the hardened language from EU representatives overnight it is hard to envision how the UK stays in the single market.

AUM-FTSE-300616-SML
Click to enlarge

But let’s not be too disingenuous, markets globally are rallying and it is another great example of the concerning TINA (There Is No Alternative) effect for equities. While the full consequences of Brexit are still uncertain, the one thing it has accomplished very successfully is dropping global bond yields to new lows and keeping global monetary policy looser for longer. Negatively yielding government debt has surged by more than a trillion dollars since the end of May because of Brexit and now stands at US$11.7 trillion. In such a situation, the drive for yield has never been stronger, which has seen people piling into dip-buying with little thought for the fundamental picture. One should also remember that active managers took a beating in the first quarter of the year and have been hammered in the press for offering an after-fee performance that is worse than just buying an index fund. Given we’re approaching the end of the second quarter reporting period there were also some strong structural incentives for active managers to chase the market and make sure they didn’t see their second quarter returns similarly wiped out.

Global Indices Returns

AUM global indices returns 300616

It is interesting to see that Greece, Italy and Spain have largely missed out on much of the rebound, which arguably shows that the concerns about the European Union’s survival in the wake of Brexit have not dissipated. And that it is high-quality ends of global market that have been seeing most buying in the rebound.

Asia is set to follow US and European markets higher with financials and energy set to see strong gains in most markets. The EIA weekly crude oil inventories declined by 4.1 million barrels, which helped rally the WTI oil price by 3.5%. But the overnight drop in the US dollar helped the whole commodities complex with gold, silver, copper, iron ore, aluminium, and platinum all ending the session higher. This bodes well for the materials space in the ASX today.

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