Investors have been bargain hunting on the FTSE 100, buying up shares that had fallen in value [Image: Reuters].

Investors have been bargain hunting on the FTSE 100, buying up shares that had fallen in value [Image: Reuters].

You may have heard that the stock markets are rallying after the Brexit vote on June 23, based on reports that the FTSE100 has bounced back. That’s a bit misleading. Here’s why:

To get a better indication of the UK economy, it is helpful to look at the FTSE 250, or the 250 biggest companies in the UK, which is more dependent on the UK economy than the multinational companies represented in the FTSE 100.

The FTSE 250 fell 13 per cent in two days after the vote came in. It has recovered a little since then, but not on the scale of the FTSE 100. By close on Friday it was trading at 16,465.49, some way off its pre-Brexit high of 17,333.51 on Thursday June 23.

Confidence in domestic companies is low because the outlook for the UK economy doesn’t look good. There’s a much higher risk of recession, according to Standard & Poor’s, who put the likelihood of recession in the next 12 months between 20 and 25 per cent, compared to 15 and 20 per cent in March.

George Osborne, the Chancellor, has abandoned his target of reaching a budget surplus by 2020. That will come as a relief to those who believe greater public sector spending will be necessary to address the knock on effects of the slowing economy.

But it’s another indication that the UK’s economic recovery has been derailed by the vote to leave the EU, despite how things seem on the FTSE 100.

Source: Why the FTSE 100 at a post-Brexit high is not necessarily good news | Business News | News | The Independent

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