Volatility and lower yields in June

UK Equity Income

Share prices in the UK plunged in June following the UK’s unexpected decision to leave the European Union (EU). In the much-discussed referendum, a narrow majority voted in favour of Brexit, triggering turmoil across global financial markets. In the UK, gilt yields posted sharp declines, the pound plunged to a three-decade low against the US dollar, and the FTSE 100 Index plummeted by almost 9% in the immediate aftermath.

Nevertheless, the UK’s blue-chip index rebounded to end the month 4.4% higher, boosted by investors seeking companies with stable overseas earnings. However, medium-sized and smaller companies – which tend to be more exposed to the domestic economy – fared less well: the FTSE 250 Index fell by 5.3% over June as a whole, while the FTSE Small Cap Index lost 2.7%. The best-performing FTSE sectors over the year to date include industrial metals & mining, mining, oil & gas producers, tobacco, and personal goods. At the other end of the spectrum, the worst-performing sector since the start of the year was real estate investment & services, followed by life insurance, leisure goods, and banks.

The result of the referendum led to significant volatility in share prices; this was particularly pronounced amongst sectors perceived to be vulnerable to the longer-term uncertainties surrounding Brexit, and included banks, housebuilders, and airlines. Banks are perceived to be particularly vulnerable: looking ahead, amid fears of slowing economic growth and a resulting decline in demand for loans, dividend payouts could be cut or even cancelled. Meanwhile, budget airline easyJet issued a profit warning, citing an increased risk of “additional economic and consumer uncertainty” in the wake of the Brexit vote. Elsewhere, in a trading update, estate agent Foxtons warned that an expected upturn in the London property sales market in the second half of 2016 is now “unlikely to materialise”.

The yield on the FTSE 100 Index fell from 4.01% at the end of May to 3.84% at the end of June, while the FTSE 250 Index’s yield fell from 2.96% during June to end the month at 2.82% and the yield on the FTSE All Share Index fell from 3.75% to 3.66%. However, the FTSE Small Cap Index’s yield climbed from 2.96% to 3.07%. In comparison, the yield on the benchmark ten-year UK government bond plunged during June from 1.56% to 1.00%.