FTSE 100 Index Gets A Leg-up Rally With China’s Calm Down Signal

FTSE 100 Index Gets A Leg-up Rally With China’s Calm Down Signal

Amid positive development in the US-Sino trade talks, FTSE extended its gains on Friday. Strengthened by the surge in the mining shares as nickel prices touched an all-time high, backed by positive signs of resumption of an ongoing trade spat between the United States and China.

Heavyweight mining companies like Rio Tinto (LSE: RIO) and BHP (LSE: BHP) were among the top gainers on the blue-chip index FTSE 100. Also, the constituent sectors of the broader index FTSE 100 edged higher after China signalled overnight that they would settle trade tension and end their long-standing trade spat with the US. However, despite a sharp rally in FTSE 100 index witnessed in the late August, the broader index of the UK is still on course to report its sharpest monthly drop in four years.

A day earlier, in the August 29, 2019, market session, shares of export companies added gains as the pound fell against the US dollar post suspension of parliament that invoked concerns for a no-deal Brexit. However, fresh comments of Beijing to resume ongoing trade has come as a relief to the stock markets globally. Export constituent stocks of the FTSE 100 index also found support in a fall in sterling value post the newly elected British Prime Minister Boris Johnson’s announcement to suspend parliament. The move has embarked the oppositions as it limits the time available to prevent Britain from crashing out of the European Union without a deal in October.

This move was supported by the US President Trump; Johnson took his toughest move yet to take the UK out of the EU bloc on the scheduled Brexit day of October 31, 2019, with or without a formal deal, by setting a new date for a state opening of parliament. Known as the Queen’s Speech, the formal event will be held on Oct. 14 and be preceded by a suspension of the House of Commons, meaning parliament will not sit between mid-September and mid-October. The move, which had to be approved by Queen Elizabeth, limits the time opposition have to derail a disorderly Brexit, but also increases the chance that Johnson could face a vote of no-confidence in his government, and possibly an election.

It’s been more than three years of the Brexit referendum in which people voted 52% to 48% to leave the European Union bloc, uncertainty is still hovering on what terms and conditions European Union’s second-biggest economy will take divorce from the club that it entered in 1973.

With less than two and half month time until exit day, parliamentarians of the House of Commons are still battling to prevent Johnson from taking the United Kingdom out of the EU bloc without a proper formal agreement, pitching one of Europe’s most stable countries into uncharted territory.

On August 27, 2019, the leaders of opposition parties united against the prime minister’s move to suspend parliament and decided to seek to utilise parliamentary procedure to compel the prime minster to ask Brussels for a further extension to EU divorce beyond the schedule date of October 31, 2019. They are keeping no stone unturned to bring Johnson down. Jeremy Corbyn, opposition leader of the Labour party recently commented that he would seek to call a no-confidence motion against the prime minister when the time was right.

Despite the Brexit mess, is the UK market offering value to the investors?

The broader index of the UK FTSE100 comprises of 100 large companies with high market capitalisation. It is also regarded as a global benchmark index because the majority of its constituents are global companies, they have significant presence worldwide, and their top line is widely diversified. Therefore, when you are buying the stock of FTSE 100 companies, you are not just investing in UK stocks, but you are adding global stocks into your portfolio.

The present ongoing political crisis in the UK is really offering several golden opportunities for the investors, as UK stocks are available at a cheaper valuation against the other developed economy’s stocks. Let’s take the example of the US market, the broader index of the United States S&P 500, which reflects a portfolio of 500 large companies, is trading at a Price-to-Earnings ratio of 20x with the dividend yield of 2.47%, whereas the FTSE 100 index of the UK is trading at a Price-to-Earnings ratio of 14x with a dividend yield of 4.83% respectively.

The UK stocks have not participated in the recent bull run because of some of their home-grown problem like Brexit. In absolute terms, over the past five years, the S&P 500 index of the United States has handed approximately 44.15% return, whereas the broader index of the London Stock Exchange the FTSE 100 index, has delivered just 5% in the same period of time. Once the Brexit mess gets resolved, we believe that stocks from the London Stock Exchange will deliver the best return against the global developed economy’s stocks. Also, the dividend yields of the UK stocks are relatively very high, which suggests possibility of decent dividend income and capital appreciation as well in the mid to long run.

Deepening Brexit Crisis and its impact on the Sterling and Gold

Uncertainties related to the Brexit are deepening further. As on August 20, 2019, the European Union discarded British Prime Minister’s demand to reopen the backstop negotiations. In response to the demand raised by Boris Johnson, the European Union commented that the UK had failed to come up with any proper realistic alternative arrangement to an insurance policy for the Irish border.

In a four-page letter written by British Prime Minister to European Council President Donald Tusk in which he asked him to remove the “Irish backstop” from the divorce deal. Prime Minister Johnson argued that the Irish backstop- which is a part of Divorce Agreement that then prime minister Theresa May agreed upon, should be replaced with a “commitment” to execute other alternatives as part of a deal on the after-divorce relationship.

Meanwhile German Chancellor and one of the most powerful leaders in Europe, Angela Merkel, commented that Divorce agreement which contains the Irish backstop, should not be changed and European Union should consider practical solutions for this, as it is a matter of our future ties with the UK and I believe we will respond in a very unified way. She also added that the moment we would have practical solutions, we don’t need any backstop anymore and EU is ready to find a solution.

Recently the European Union Council President Donald Tusk tweeted that, “Those who are not in favour of the backstop and not suggesting any realistic options, in fact support renewing a border. Even if it is not accepted by them.”

Post Boris Johnson’s announcement to put the British parliament on silent, sterling nosedived against the US dollar and breached all its support level and was quoting $1.1042 as of 30 August 2019 before the market closing. The currency is in steep downtrend increasing tensions for importers; however, it is benefiting the export-oriented business. The sterling has fallen approximately 1% in August 2019 and was down by approximately 4% on a YTD basis.

Also, the tumbling sterling has jolted the investors’ sentiment, and they are shifting to more safer asset classes. This has led to a steep plunge in the mid-cap, small-cap and AIM segments of the London Stock Exchange. Also, these segments are highly exposed to the risks related to falling Pound as their majority of revenue comes from outside of the UK. Import based companies are suffering the most, as a devaluation of the currency has inflated their import bills, and this would continue to prevail amidst rising chances of a no-deal Brexit.

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