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Investment Committee Meeting Minutes - August 2016

  • By Richard Ellis
  • 07 Oct, 2016

After the initial panic caused by the result of the EU Referendum, domestic markets were calmed by the reassuring comments made by both the then Chancellor and the Governor of the Bank of England.

The slump in the value of sterling has also helped overseas investments although those of us who holidayed in Europe, the US or further afield will have noticed that our pounds did not stretch anywhere near as far as they have done in previous years. The true impact of Brexit has not materialised yet, of course, and it remains to be seen what happens when Article 50 is triggered and the real work to draw up trade agreements starts.


  • UK equity markets recouped their post-referendum losses in July. The FTSE 100 climbed to a 12- month high spurred on by the weakened sterling environment, while the FTSE 250 surged back to pre-referendum levels. The rally in commodities witnessed through Q2 slowed in July, as Brent Crude entered into technical bear market territory at $42 a barrel, which is more than 20% down from the previously recorded highs.
  • Sectors whose fortunes are tied to energy and commodity prices were notably less upbeat, despite the tailwinds from weakened sterling. BP missed second quarter forecasts posting a 45% slump in earnings, while Royal Dutch Shell reported a 70% earnings slide for its full first quarter after completing the £35bn take-over of BG.
  • Corporate news released during the month provided mixed indications of the economic impact of Brexit. Widespread profit warnings were offset by positive updates from certain companies and sectors, particularly those buoyed by overseas earnings.
  • Lloyds Banking Group cited the UK’s “uncertain” economic outlook as a factor behind plans to accelerate its cost-cutting strategy, as it announced the planned closure of 200 branches and 3,000 job losses.   Conversely, Astra-Zeneca confirmed expansion plans with an extra 2,000 jobs for its Cambridge research facility.


  • Over the course of July Brexit concerns eased and a more confident view of the economy helped to promote a steady improvement in investors’ risk appetite. The “risk on” mode, coupled with mostly well-received Q2 2016 corporate earnings, helped the S&P 500 index to a new daily record for the seventh time in a month on the 29th July. Overall the index returned 3.69% in July, continuing its extended run of positive monthly gains and is up 7.66% year to date.
  • The Fed kept interest rates on hold, remaining cautious on future hikes.
  • US economic data showed robust Q2 US consumer household spending growth of 4.2% supported by solid labour growth. However, Q2 GDP growth of 1.2% came in well-below market expectations of 2.6% primarily attributed to sluggish corporate activity and tentative global demand. Such divergence in GDP growth and household spending was in part due to how companies record profits. Instead of investing back into economic activity, companies are sitting idle on cash or using earnings to buy back shares and issue higher dividend payments.
  • July saw a number of large-scale merger and acquisition deals and corporate share buyback activities represent one of the main reasons why the US stock market has been doing so well. While this points to a healthy appetite for financial risk, it is in stark contrast to companies’ more muted inclination to take business risks.
  • At sector level some of the strongest returns came from cyclical stocks as risk appetite increased, with IT leading the advance. The perceived “defensive” consumer staples and utilities sectors underperformed, while the energy sector was hurt by declining oil and gas prices.


  • European equity markets rose in July, posting their best monthly gain of 2016.
  • At sector level, technology was the best performer, followed by the industrial sector.
  • Headline inflation in the Euro area accelerated to 0.2% beating market expectations and registering the highest level since January 2016.
  • The ECB left its monetary policies unchanged; preferring to give more time to the existing measures and waiting for the aftermath of the Brexit vote.
  • The European Banking Agency (EBA) released the results of its 2016 Banks stress tests which showed that the regulator is relatively comfortable with banks’ solvency and highlights the significant improvement in the overall sector’s capital levels compared to previous years.


  • Asian equity markets made solid gains as global macro concerns eased. Most Asian currencies either strengthened or held firm against the US dollar.
  • Further signs of stabilisation in China’s economy also helped improve investor sentiment. There was strong consumer data with car sales accelerating to 18% year-on-year and residential house sales to 14% year-on-year while Q2 GDP growth of 6.7% year-on-year was in line with expectations.
  • Despite the improved outlook for corporate earnings, the Chinese equity market lagged the broader region amid news that the banking regulator is planning to crack down on the country’s huge market for wealth management products.
  • Australia and Thailand were the region’s best performing equity markets over the month, recovering some of their recent underperformance.
  • Global emerging equity markets registered healthy gains during the month in anticipation that interest rates in the developed world will remain low for longer, particularly in Europe, UK and Japan. Latin America was the best performing regional equity market.


  • The Japanese equity market ended the month higher in local currency terms. This was driven by speculation surrounding policy easing by the Japanese authorities as they attempt to stimulate the fragile domestic economy. Despite the gain, equity markets have fallen year-to-date amid concerns about the strength of the Yen and questions about the effectiveness of the BOJ’s monetary policy.
  • Corporate earnings results for the most recent quarter have, to date, delivered more positive than negative surprises. Given the current low interest rates, corporates are continuing to arrange share buybacks, providing support to the equity market.


  • Bond markets continued to rebound from their initial post Brexit sell off during July.
  • UK investment grade corporate bonds enjoyed their strongest month since August 2009 delivering a total return of 5.2% The Gilt market also extended its gains from June delivering a total return of 2.1%
  • According to data from Merrill Lynch, gilt yields in aggregate fell 15 basis points to the end of July at 0.85% while sterling investment grade corporate bond yields were 52 basis points lower at 2.44%

What do we think?

After the initial panic caused by the result of the EU Referendum, domestic markets were calmed by the reassuring comments made by both the then Chancellor and the Governor of the Bank of England. The slump in the value of sterling has also helped overseas investments although those of us who holidayed in Europe, the US or further afield will have noticed that our pounds did not stretch anywhere near as far as they have done in previous years. The true impact of Brexit has not materialised yet, of course, and it remains to be seen what happens when Article 50 is triggered and the real work to draw up trade agreements starts. Already strong messages have been emanating from senior Government officials of our Continental neighbours who, of course, need to sound tough when asked to comment about the UK’s relationship with the EU.

The road ahead is likely to be rather bumpy……

Date of next meeting:  27th September 2016

Fraser Heath News

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