At the end of last year, I made a few predictions. I said the FTSE 100 (INDEXFTSE: UKX) would make steady progress, reaching 6,600 by the end of 2016.
Well, it’s now only August, and the FTSE 100 has already reached 6,650. It has rocketed up from the 6,200 it stood at in the beginning of the year. And the catalyst seems to have been the EU referendum, confounding most commentators, including myself.
Confounding the commentators
Faced with a choice of the overwhelming change of Brexit and the status quo, the mainstream in the media and government plumped for the status quo. After all, the economy was doing so well anyway, why spoil it?
We all predicted doom: a crashing stock market, rising unemployment, and slowing growth. Yet, more than a month after the vote, the only thing that seems to have crashed is the pound. And that, actually, can be quite a good thing.
The weak pound means that overseas investors want to buy UK shares, because they’re that much cheaper now. So the stock market has been bid up. It also boosts exporters, of which Britain still has many, who find that their goods sell that much more cheaply, and competitively, abroad.
It might give inflation a bump upwards as imported goods have become more expensive, but in these deflationary times where the inflation rate has remained stubbornly below the Bank of England’s target, that’s also quite a good thing.
There’s been talk of cutting interest rates, or restarting QE, to boost the UK economy. At the moment there’s little sign that this is required.
Sell in May? Not this year
The latest employment figures, instead of disappointing, have been startlingly good, and show that Britain continues to be a jobs creation engine that’s the envy of the world. The level of employment is the highest it has ever been, and posts continue to be advertised, offered and taken up.
And the last quarterly growth rate of 0.6% means that the economy is growing at a very respectable pace. Companies around the country are still taking orders and making profits.
And if you hold, as I do, a substantial portfolio of overseas shares, then you get another boost. Thanks to the weak pound, my holding of Chinese and Indian funds has jumped by over 10% since Brexit. I’ve long advocated the merits of emerging market shares, and we’re just beginning to see these investments come good.
“Sell in May and go away, don’t come back till St Leger’s Day,” is the oft-quoted stock market saying. This is one year where this prediction has been utterly confounded. You would have missed out on a nearly 10% rise in your shares.
Plus I think when traders return from their holidays in September, the FTSE 100 could push on further. That’s why I think the stock market could well reach an all-time high, touching 7,000 points by year-end. That long-awaited bull market could just be beginning.
