FTSE 100 faces uncertainty ahead

CMC Markets

The FTSE 100 closed in the red on Monday, weighed down by sterling advances as the pound’s climb hurt exporters, before a rollercoaster day on Tuesday saw it close in positive territory. Its closing price on Tuesday was 7,267.95.

Surprise growth figures earlier this week estimated that the UK economy grew 0.3% in July, which would be its strongest monthly growth since January, helping to reduce fears that Britain is sliding into a recession. The pound hit a six-week high on Monday, partly as a result of this announcement.

What does Brexit mean for the FTSE 100?

There seems to be no escape from Brexit. The UK prime minister Boris Johnson’s slightly softer approach to a no-deal Brexit at the start of this week, when speaking with the Irish prime minister Leo Varadkar, helped boost demand for the pound.

As the FTSE 100 gets most of its income from non-UK economies, on the whole its members generally benefit from a weaker pound. For example, while a FTSE 100 company may be based in the UK, a large proportion of its operations could be based overseas. The company would report in sterling, so when it translates its income into sterling, it would benefit from a weak pound.

The continued recovery of the pound, therefore, has weighed on the earnings of internationally-focused companies, resulting in the FTSE closing 52 points lower on Monday. Market analyst David Madden noted that "This has been a common situation in the past week, where the jump in sterling has dented the international equity index."

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However, nothing is straightforward when it comes to Brexit. On Monday night Boris Johnson lost another vote surrounding his proposal to hold an early election. Of his first six votes as prime minister, this is his sixth consecutive loss in the House of Commons.

As of early Tuesday morning, parliament has been suspended, and is not set to reopen until 14 October. The five-week suspension, which has sparked controversy given its length and timing, has been met with protests from some MPs. Downing Street must now either get the majority of MPs to back a deal or no-deal Brexit by 19 October, or the PM will be forced to seek an extension from the EU.

Since Brexit has, on the whole, so far contributed to a weakening pound, further uncertainty over the coming months could see the FTSE 100 post further rises. But as with all things Brexit, the future remains entirely ambiguous.

Latest FTSE reshuffle sees surprise M&S departure

The latest FTSE reshuffle, announced on 4 September, saw the end of an era for Marks and Spencer as it was relegated from the FTSE 100. Its relegation to the FTSE 250 follows a poor share price performance (the M&S share price has dropped 17% since the start of June) and the closure of 120 stores as part of an overhaul.

As one of the founding members of the index, the FTSE 100 will now have just 27 of its original members left (16 of which still have the same name), following the departure. This reinforces the changing composition of the FTSE 100. Since its founding in 1984, there are now eight more consumer services companies in the FTSE, as well as several technology companies, while there has been a drop in the number of industrial and consumer goods companies that make up the index.

Helal Miah, an investment research analyst at the Share Centre, noted that there is a “clear distinction between those on the way up and those heading down and highly reflective of the current economic and political environment,” as “out go the more UK-focused businesses while those with a more global exposure look to replace them.”

Looking ahead to the next FTSE 100 reshuffle later in the year, companies that could be dropped include Direct Line and Kingfisher.

How have other FTSE 100 companies performed?

Sports fashion retailer JD Sports topped the FTSE 100 risers on Tuesday, after its positive trading update saw the share price jump around 9%. JD Sports reported a 47% rise in revenue and 6.6% increase in profit for the first half of the year. The company has done well off the back of the soaring ‘athleisurewear’ market, which has helped protect it from some of the woes facing other retailers. JD Sports’ expansion into the US has also helped its performance, following the £400m acquisition of Finish Line. 

As sterling hovers around the six-week high it hit on Monday, AstraZeneca and GlaxoSmithKline are likely to face some pressure, as strength in the pound will lower the value of their US earnings. Just Eat was the FTSE 100's biggest loser on Tuesday, as its share price fell more than 6%.

Following a five-day positive streak for crude oil prices, oil heavyweights Shell and BP have advanced. British Airways owner IAG’s share price made a solid recovery following declines as a result of its pilots striking, climbing over 4% on Tuesday. And Barclays also performed well, rising 4.9%, as the bank announced it will set aside between £1.2bn and £1.6bn to settle the mis-selling of PPI.