Brexit delivered a shock to the political and financial world in the UK. No one expected it, although the vagueness of opinion polls should have been a warning. The immediate aftermath was a sharp fall in the value of sterling and UK equities followed by a recovery of UK equities in sterling terms although not when measured in other leading currencies.

With hindsight it looks as if some large traders were positioned the wrong way ahead of the vote and had to unwind positions in short order. Good for brokers but unsettling for investors.

Nevertheless, it now appears that a calm has been restored to UK, and rather oddly, overseas equities as well. The fact that the impact of the UK poll had such large repercussions tells us that markets were poised for a change, but were not quite sure which way to go.

In the UK the most obvious development was a dramatic increase in the incipient divergence between the large companies and the smaller ones. Over the last three months the FTSE 100 has gained 8.6% while the FTSE 250 is up only 3.4% and over six months the differences are even larger at 13% and 6.3% respectively.

As with any such development there are a number of reasons for this. One is that the larger companies are international and have very little exposure, in some cases none, to the UK economy. Another factor is that a weaker sterling increases the value of profits and cash repatriated from other currencies. In addition larger companies are viewed as less risky than their smaller brethren and in part that is related to perhaps the major reason for the divergence which is the different levels of liquidity.

This issue is most obvious in the property sector and is well illustrated by the 9% drop in the FTA REITS Index over the last 3 months and that is a continuation of the 22% fall over the last year. However, the fact that it is still up 56% over 5 years is a measure of how far it has travelled. Looking back it is obvious that the sector had become overpriced and was due for a correction and that logic also applies more widely to the mid and small cap sectors.

The risk is twofold. One…

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