UK equity market review – July 2016

UK Equity Growth

The fallout from the UK’s Brexit decision continued to overshadow newsflow and sentiment during July. In particular, the first half of the month was dominated by political upheaval that resulted in the appointment of Theresa May as Prime Minister and Philip Hammond as Chancellor of the Exchequer.

Over July as a whole, the FTSE 100 Index rose by 3.4%; meanwhile, the FTSE 250 Index – which had been badly hit following the Brexit vote in June – climbed by 6.2%. Over the year to date, the FTSE 100 Index and the FTSE 250 Index have risen by 4.2% and 0.8% respectively.

The UK property sector was savaged in the wake of the Brexit vote, and several leading fund-management houses suspended their UK property funds following a surge in post-referendum redemptions by worried investors. Nevertheless, Financial Conduct Authority (FCA) CEO Andrew Bailey pointed out that, rather than reflecting panic, the ability of these funds to suspend trading is “designed… to deal… (with) some shock to the market”. The Investment Association (IA) reported that property funds suffered outflows of £1.4 billion during June. Elsewhere, according to the Bank of England’s (BoE’s) Financial Stability Report , foreign inflows to the commercial property market fell by 50% during the first quarter of 2016. The report highlighted steep falls in the share prices of real estate investment trusts that reflect an increased risk of “future marked adjustment in commercial real estate prices”.

In a bid to boost lending to households and businesses, the BoE cut the requirement for banks to hold a “capital buffer”. Eight leading banks and building societies – Barclays, HSBC, Lloyds, Nationwide, Metro Bank, RBS, Santander UK, and Virgin Money – signed a letter agreeing to step up lending to UK households and businesses. According to BoE Governor Mark Carney , their pledge means that three-quarters of UK banks now have “greater flexibility to supply credit to UK households and firms”.

Results of pan-European bank “stress tests” were published during the month. The tests – carried out by the European Banking Authority (EBA) – were designed to assess the reactions of 51 individual UK and European banks to a severe economic shock. British and Irish institutions that performed relatively poorly included Royal Bank of Scotland (RBS), Allied Irish Banks (AIB), and Barclays. Beleaguered Italian bank Banca Monte di Paschi di Siena came at the bottom of the list.