Following the initial post-Brexit sell-off, FTSE stocks have begun to rally and recover much of their initial losses, but Columbia Threadneedle warns these rallies may not be supported by good fundamentals.
Columbia Threadneedle chief investment officer for Europe, the Middle East and Africa, Mark Burgess, says there are multiple drivers for the recent rally, including the “translation effect of a very weak sterling boosting profit forecasts” for FTSE 250 companies, as well as the appointment of a new British prime minister.
“The twists and turns of the political landscape have been hugely unpredictable, but the fact we now know who the next UK prime minister is, and that Theresa May is in place much earlier than we had expected, is certainly in the short-term a fillip for markets and has helped settle investor confidence,” he said in a note to investors.
Mr Burgess said there is a perception that core bond yields could “grind ever lower” , which is subsequently “forcing investors to look for yield wherever they can find it”.
“Investors have learnt in recent years that, faced with torpid growth and an abundance of developed world QE, they have few places to go other than equities,” he said.
UK equities yields are currently four times that of a ten-year gilt, and according to Mr Burgess, it’s “no surprise” investors are taking advantage of this, but he warns this rally “feels somewhat unjustified and unsupported by the fundamentals”.
“There are going to be a number of headwinds facing the UK economy as we detach ourselves from the EU over the coming years, which will likely reduce economic activity in the UK and impact domestic profits,” he cautioned.
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