As Britain's benchmark share index flirts with all-time highs amid a multi-decade collapse in the country's currency and near-zero bond yields, investors are left to again wonder which market offers the best reflection of the country's fortunes outside of the European Union.
Tuesday saw yet another downward lurch for the beleaguered pound, which fell to a 31-year low of 1.2786 against the US dollar, as investors translated the most recent assessment of the country's so-called "Hard Brexit" intentions from U.K. Prime Minister Theresa May. Suggestions that the City of London's financial center won't be afforded special treatment as May seeks to tame immigration concerns and forego membership in the European single market, however, failed to limit gains in the FTSE 100, which rose 1.3% to 7,074.34, just shy of the April 2015 record. In the meantime, two-year government bond, or gilt, yields were little changed at 0.119%
The seemingly contradictory moves illustrate the nature of both the U.K.'s benchmark share index and the difficultly in isolating an asset class that investors can reliably turn to when assessing Britain's economic and financial future.
Interest rate traders were once fond of reminding clients that bonds markets act as daily referendum on the government: yields (which move inversely to prices) rise as perceived fiscal risk increased and fall when markets were comfortable that the nation's books would eventually be balanced. The collapse of Lehman Brothers and the global financial crisis that followed has essentially destroyed that axiom as central banks purchase ever-more billions in government bonds in their (some would say doomed) effort to stoke inflation and re-ignite growth.
When Italy - a country with a debt-to-GDP ratio of around 130% that's suffered three recessions in the past ten years - can raise €5 billion ($5.6 billion) in a sale of 50-year bonds that yield less than 3%, it's safe to say bond markets aren't functioning normally.
The same may be said for Britain's FTSE 100, which is comprised largely of outward-looking companies with global interests; firms in the index earn more than 75% of their revenues outside of the U.K., which rise in lock-step with a decline in the pound. Against that dynamic, it's not surprising that sterling investors in the FTSE 100 have enjoyed gains of 12.1% since the June 23 referendum, but that converting those gains to U.S. dollars would result in a 2% loss.
Booze, Drugs and Cigarette Makers Rise on Weaker Pound
Not all shares in the benchmark are performing in-line with the broader gains, either. So-called "sin stocks" such as Diageo (DEO) - Get Report and British American Tobacco (BATS) have gained considerably since the Brexit vote, with the former notching a 24.5% advance since June 23 (and more than 3% since last week's close). The maker of Johnnie Walker whiskey generates 90% of sales outside the U.K. Lucky Strike cigarette maker BAT generates less than 2% of sales in the U.K. and its shares are up 18% since the Brexit vote.
In the pharma sector, AstraZeneca (AZN) - Get Report is up almost 30% and GlaxoSmithKline (GSK) - Get Report has gained almost 19%. London-listed miners are also getting a boost from the depreciated currency, with Rangold (GOLD) - Get Report up 15% since the vote and precious metal producer Fresnillo (FNLPF) up 40%.
Banking stocks, however, have had a much more difficult ride since the June vote, as the largest domestically focused lenders, Royal Bank of Scotland (RBS) - Get Report and Lloyds Banking Group (LYG) - Get Report , took the brunt of the Brexit fallout. RBS is down about 27% since June 23, partly because of worries about looming multi-billion-dollar fines from lawsuits on both sides of the Atlantic which are only partially covered by provisions.
Lloyds shares have given up around 23%, with the bank seen on the hook for additional consumer payouts for what banks like to call legacy conduct issues. Barclays (BCS) - Get Report , which only drew a third of its first-half income from its U.K. retail division, fared better, falling about 9%. Asia-focused HSBC (HSBC) - Get Report is up 36%.
So-called "challenger" banks, the mid-tier British lenders that either emerged or expanded significantly after the credit crisis, had initially looked set to be the hardest hit because of their greater exposure to the domestic economy, including a housing market that had looked vulnerable to a post-vote slowdown.
Resilient Economy Defies Forecast Gloom
But a string of recent data, including an encouraging Tuesday construction-sector purchasing managers' index from CIPS/Markit and robust credit growth, make the domestic outlook brighter. And these lenders have overwhelmingly clean sheets in terms of past conduct.
Curiously opaque forecasts Tuesday from the International Monetary Fund's World Economic Outlook report - which raised it 2016 growth estimate for the UK to 1.8% but lowest its 2017 prediction to 1.1% - only added to the markets' indecision.
Which perhaps explains why Brexit concerns are being played out more sensationally in the currency markets, where central bank influence is far less significant and gains can be booked in an investors currency of choice. Deep, liquid and global forex markets allow investors to express immediate - if not entirely accurate - views on Britain's EU exit, creating dramatic swings in value.
That is, unfortunately, likely to continue in the weeks and months ahead as Britain's government continues the painstaking process of establishing its Brexit vision and negotiating the new relationship it will establish with its biggest trading partner once the EU withdraw is completed in early 2019.