Overall in 2016 it was the FTSE 100 that saw very strong returns post-Brexit with money veering towards big companies with large overseas operations that were likely to benefit from currency moves. Performance came in two waves.
First, it was driven by the currency fall post the referendum. Second, there was a big sector rotation into financials and commodities post the Trump election result due to the perception that the new US President would spend heavily on infrastructure and would put measures in place to reduce regulation on the banking system.
Higher growth is generally good for commodities and financials and you saw investors heavily rotating into these sectors. The FTSE 100 has exposure to many global mining companies such as Glencore and Rio Tinto as well as many global banks, which again added another leg up to its performance at year end.
It is interesting to note the performance of the FTSE in the first few weeks of 2017. The equity market went on the longest winning streak it has ever had with the FTSE up a record 14 days in a row. So what was the driver? Mere speculation was the main one as well as the return of overseas investors to UK equities given the fact that hard data confirmed the post-Brexit slump was largely a fallacy. Also the fact that some investors expect the triggering of Article 50 will lead to another fall in sterling, which will drive the FTSE higher once more. We have also had talk of the reflation trade in the US, which will have a linked effect on the UK.
We do not see a big strengthening of sterling as data is likely to soften slightly from here, including GDP. Over the years growth has been reducing slightly, also much of the recent growth has been driven by the consumer and by the expansion of credit. This is unlikely to persist in the long term, particularly with the tick up in inflation.
For the currency to strengthen you need the economy to strengthen. We do not see that as a serious possibility right now.
Nathan Sweeney is a multi-asset active manager of Architas
Key points
The sterling weakness we saw in 2016 was clearly associated with Brexit.
In 2016 it was the FTSE 100 that saw very strong returns post-Brexit with money veering towards big companies with large overseas operations.
We do not see a big strengthening of sterling as GDP is likely to soften.
