FTSE 100 Under Pressure As Brexit Vote Nears

Risk-taking in the United Kingdom continues to tumble ahead of the all-important “Brexit” vote set to take place next month. The atmosphere surrounding the vote is growing increasingly tense as politicians highlight the benefits of greater unity while business leaders tout the benefits of leaving.  However, the looming problem is not the vote itself, but rather the day after and how markets behave. Nailing down concrete and quantifiable evidence of the impact of an exit vote remains undetermined despite numerous models and estimates. The overwhelming problem is how the run up has dented risk sentiment and snuffed out investment in the UK economy. With businesses and individuals not seeking to take risk ahead of the critical vote, the one place this uncertainty has been most evident is the benchmark FTSE 100.

Directionless

The upcoming vote remains very tight and currently looks deadlocked between “Brexit” and “Bremain”, adding to the volatility in financial markets. According to Bank of England Governor Mark Carney, the vote could potentially thrust the UK economy into recession. Although the outcome of the vote is not necessarily the catalyst for the shifting economic climate, the faltering level of activity in the lead up to the vote may be the culprit.  From a traders perspective however, this presents a substantial risk not just for the UK, but also the broader global economy based on the degree of interconnectedness between markets. The FTSE 100 index in particular has been a poor performer over the last year, falling -11.50% during the last 52-weeks. A stagnating fundamental backdrop combined with weak component performance will continue to weigh on the index going forward.

Looking at the composition of the FTSE 100 index, it becomes clear the high degree of concentration with 5 companies accounting for 23.68% of the entire index.   Two of the most impacted components include British Petroleum and Royal Dutch Shell which have fallen by -19.40% and -12.02% respectively over the last 52-weeks. In general resource companies have been amongst the hardest hit, with Glencore plunging -54.76% over the same period.  Additionally, the banking and financial services sector remains under pressure, especially with HSBC accounting for 5.49% of the total index (as of April 29th). Year to date the company has seen its shares plunge by -19.51% after a terrible -30.23% return over the last year. Over that time period, only 33% of the total constituents have exhibited positive returns, highlighting the struggle to perform, especially for companies with substantial international exposure.