The shock outcome of the UK’s referendum on whether to stay in the EU last week has unleashed havoc in markets. The FTSE 250 plummeted and safety-seeking investors poured into gold and bonds, while by Tuesday 28 June the UK had suffered another blow as ratings agencies Standard & Poor’s and Fitch downgraded their ratings, respectively, from AAA to AA and from AA+ to AA.
The FTSE 100 ended down 3.15 per cent on Friday 24 June, but it was the FTSE 250 that took the real beating. By Tuesday morning it was down 14 per cent over two days – its worst losing streak since the crash of 1987. Unlike the FTSE 100, which includes many blue-chip companies that could benefit from more competitive exports due to falling sterling, the domestic-focused mid-cap index is likely to be hard hit.
UK banks, insurers and housebuilders are taking the brunt of the pain. Shares in both Royal Bank of Scotland (RBS) and Barclays (BARC) were suspended from trading on Monday following double-digit losses. Among housebuilders, Taylor Wimpey (TW.) and Barratt Developments (BDEV) did particularly badly. Mid-cap-focused funds are reflecting this: at the start of this week Franklin UK Mid Cap (GB00B7BXT545) was down more than 16 per cent year to date, and AXA Framlington UK Mid Cap (GB00B64W4Q70) was down by similar amount. Old Mutual UK Mid Cap (GB00B8FC6L92)* was also down. ETFs tracking cyclical or financials indices are reeling. Between Thursday 23 and Tuesday 28 June db x-trackers Stoxx Europe 600 Banks UCITS ETF (XS7R) was down 6.7 per cent and Amundi ETF MSCI Europe Banks UCITS ETF (CB5) was down by almost 10 per cent.
But broker Hargreaves Lansdown reports that private investors have been flocking into Lloyds (LLOY), Barclays, Taylor Wimpey, Legal & General (LGEN) and Aviva (AV.) - the most purchased shares on the platform on Friday morning. Nick Train, manager of Finsbury Growth & Income Trust (FGN)*, said he is eyeing Schroders (SDR) and London Stock Exchange (LSE), and plans to invest all the trust's cash in the immediate future. And star manager Neil Woodford says: "It's appropriate to remain optimistic about a select group of equities which can deliver high single-digit returns per annum over the next three to five years. That must feel very odd at a time like this when the market is in outright panic mode, but I think it is achievable."
Perhaps the most dramatic move has been in gold. Investors seeking safety piled in on Friday, pushing up the price to $1,351 an ounce in early trading on 24 June. Later in the day gold experienced the biggest spike since the global financial crisis in 2008. Bullion surged by almost 20 per cent as investors fled the plummeting pound, which crashed to its lowest level against the dollar in 30 years. iShares Physical Gold ETC (IGLN) was trading at 14 times its May average daily volume on Friday, with a volume of $246.26m.
But Carsten Menke, commodities research analyst at Julius Baer, says: "Gold should remain supported in the short term with prices potentially reaching our bullish scenario of $1,400 per ounce," although he added that "high prices are unlikely to last".
Bond yields have also soared across the board as investors have taken shelter. The UK 10-year gilt fell below 1 per cent for the first time ever, US 10-year notes approached an almost four-year low and on Tuesday 28 June Japanese bond yields tumbled to record lows. Interest rate cuts are now being mooted across the board, with the market pricing in a 50 per cent chance of an interest rate cut in July, a 65 per cent chance of a cut by August, and an 80 per cent chance of a cut by the end of the year.
Playing the themes and protecting your money
The broad funds in your portfolio feeling the pain will be those in the UK All Companies and smaller companies sectors, while those looking healthiest will be any with a mixed asset bag. Between last Thursday and the close of play on Monday, the worst-performing open-ended fund sector was Investment Association (IA) UK Smaller Companies, which fell on average 8.3 per cent.
Among investment trusts, the Association of Investment Companies (AIC) UK Smaller companies sector was down 10.9 per cent and Property Direct-UK sector was down 10.5 per cent. But specialist property funds have held up well.
Also holding up were funds in the AIC Flexible Investment sector, which is up 1.2 per cent since Thursday. It houses funds designed to protect against volatility and preserve capital. This sector includes RIT Capital Partners (RCP)*, which invests in a range of asset classes and has only fallen 3.6 per cent in the last month. For more on RIT read this week's fund tip, and our round-up on low volatility funds.
Looking across the pond could be wise. Although the dollar has strengthened dramatically against sterling, corporate earnings remain good and the region is better insulated from the Brexit shock. Maike Currie, investment director for personal investing at Fidelity International, points to Rathbone Global Opportunities Fund (GB00B7FQLN12)*, which has a heavy weighting to the US market so should have some protection against upheavals in the UK and Europe.
Adrian Lowcock, head of investing at AXA Wealth, suggests JPM US Equity Income (GB00B3FJQ599). "This fund has exposure to the defensive areas of the US market, particularly in the large-cap space which provides access to some excellently managed businesses," he says.
In the UK Mr Lowcock recommends CF Woodford Equity Income (GB00BLRZQB71)*. "[This fund] is generally defensively positioned with larger exposure to tobacco and pharmaceutical businesses, areas that will benefit from a weaker pound while their global exposure will protect them from any deterioration in the UK economy," he explains.
The market in a minute (ARROW GRAPHS)
Currencies: Dollar beats euro and sterling
Assets: Bonds beat equities
Equities: Japanese and emerging markets equities beat UK and US
Bonds: US government, US corporate and UK government beat UK high yield
Sectors: Consumer staples and energy beat insurance, property and banks
