Investor and business confidence crash amid Brexit worries

Business and investor confidence have both taken a turn for the worse, amid growing concern about squeezed consumer purses and as domestic politics undermines Brexit talks that continued on Monday.

An investor confidence survey from broker Hargreaves Lansdown showed a sharp fall in July, with the index measure dropping 20% to 69 points from 86 points a month before.

The long term average level for the index is 99, and the lowest level since the index was launched in 1995 is 59, which was recorded in November 2016 and has coincided with a spike in expectations of an interest rate hike.

Some 44% of investors now think that there will be an interest rate rise in the next six months, up from 16% in June, with more than 80% of investors predicting an interest rate rise within 12 months, up from 54% in June.

Meanwhile, business sentiment has dropped to its lowest point for almost six years, a separate report from IHS Markit has found.

IHS Markit said the net balance of UK companies expecting a rise in business activity over the next 12 months had fallen to +35% in June down from +52% in February to the worst level since October 2011.

Although manufacturers remain sanguine, the headline reading was driven by the lowest degree of confidence in the services sector since June 2010.

IHS Markit chief economist Chris Williamson said companies were becoming increasingly worried as a result of heightened political uncertainties and the potential impact of Brexit.

“The drop in confidence pushed the level of UK optimism below that seen in the eurozone for the first time in seven years, and contrasts with multi-year high levels of optimism in the United States and Japan," he said. "As such, the survey results suggest the UK is at risk of falling behind in an otherwise solid-looking global economic outlook."

On the drop in investor confidence, Laith Khalaf at Hargreaves Lansdown said investor confidence presented a stark contrast to the stock market, which is riding high.

"The UK currently finds itself in economic limbo, with the election of a limp government and the start of the long and winding Brexit journey both creating a sense of suspense, which appears to have taken its toll on investor sentiment.

But Khalaf said a silver lining was that it suggested markets were not being driven by reckless abandon and that there is scope for improving sentiment to have a positive effect on stock prices.

"Investors are also keeping a keen eye on proceedings at the Bank of England, and are increasingly confident of a rate rise following the split MPC vote in June. The market is in agreement, pricing in a 50% chance of a rate rise by the end of this year.

"However this wouldn’t exactly be the first time a few hawkish comments raised expectations of a rate hike, only for disappointment to follow. It’s also important to maintain perspective, because a rate hike would only take us back to where we were at this time last year."

Fresh data from the Capita Dividend Monitor on Monday showed that despite the worries, UK companies had paid out a record breaking amount during the second quarter of the year.

UK dividends reached £33.3bn in the quarter, the 14.5% increase being the fastest in over three years and an all-time record.

Payouts were boosted by the weak pound plus a hefty chunk of special dividends, predominantly due to a £3.2bn payment from National Grid on the sale of part of its UK gas distribution business.