UK equities rose during February, led by a strong performance from medium-sized companies. The FTSE 250 Index climbed by 3.7% over February as a whole and hit new highs during the month, boosted by a revival in investor confidence following the Brexit referendum and by a rally in the value of the pound since its recent lows in January. In comparison, the blue-chip FTSE 100 Index rose by 2.3% over February.
Banking shares in the UK were lifted by indications from the US Federal Reserve that policymakers might implement another increase in interest rates. Meanwhile, sentiment towards companies in the UK insurance sector was dampened by the Ministry of Justice’s decision that the methodology for calculations for personal injury compensation payouts is to be changed. Elsewhere during February, Anglo-Dutch consumer goods company Unilever became a takeover target for US rival Kraft Heinz, which offered US$143 billion to buy the company. Within days, however, Kraft Heinz abandoned its bid.
Having cleared the House of Commons, the Brexit debate shifted in February to the House of Lords. According to a poll of FTSE 500 companies undertaken by Ipsos Mori, 58% of business leaders said that the result of the Brexit referendum had had a negative impact on their company, and two-thirds believe their business situation will deteriorate over the next 12 months. Nevertheless, 96% were confident their company could adapt to the consequences of Brexit, and 54% said the most important thing for the UK to obtain during Brexit negotiations was movement or access to skilled labour.
In its most recent Quarterly Inflation Report, the Bank of England (BoE) raised its forecast for UK economic expansion in 2017 from 1.4% to 2%. In 2018, however, the central bank expects the rate of growth to slow down to 1.6%, curbed by a deceleration in household spending caused by rising inflationary pressures. The European Commission (EC) warned that economic growth in the UK is predicted to lose pace in 2017 and 2018, citing the uncertainties created by Brexit. The EC downgraded its forecast for UK GDP growth in 2017 and 2018 to 1.5% and 1.2% respectively. Growth in the eurozone, on the other hand, is predicted to outstrip that of the UK: the EC expects the euro area to expand by 1.6% in 2017 and by 1.8% in 2018.