Covering the Month of July 2017
Economic readouts continued to provide mixed signals of growth in the UK economy; real GDP growth was close to 2% in the four quarters to the end of quarter one 2017, but grew by just 0.2% in the first quarter.
Warmer weather boosted UK retail sales in June, with total sales (excluding fuel) up 3% in the month, up from 0.6% in May, but doubts over consumers’ ability to bolster economic growth continued
July was particularly busy on the corporate news front, with a swathe of results reported through the second half of the month.
M&S reported a fall in quarterly clothing revenue and missed estimates for food sales, adding to evidence of diminished consumer confidence as rising inflation squeezes disposable incomes.
British American Tobacco completed its US$49.4bn buyout of Reynolds American and confirmed plans to launch its ‘heat-not-burn’ tobacco device Glo in the US market next year.
Into month end, tobacco stocks sold off sharply following an announcement by the US Food & Drug Administration of plans to launch a consultation on lowering nicotine levels in combustible cigarettes
The US equity market remained within earshot of all-time highs in July supported by the latest set of corporate results. Generally positive earnings bolstered confidence in the strength of the US economy.
The rate of US growth picked up steam in the second quarter, growing at an annualised rate of 2.6%, from 1.2% in the first quarter.
Indeed, the number of jobs being generated by the US economy beat all expectations in June. Some 220,000 jobs were added in the month, markedly higher than expectations. However, the sustained weakness in wage growth could fuel the debate over when the Fed should next raise interest rates.
During the month, Fed chair Janet Yellen signalled that the central bank wouldn’t rush to increase interest rates and would do so only gradually; the US stock market rallied in response.
Telecoms and IT were the best performing sectors.
The healthcare sector was among the weaker performers over the month. The share price of healthcare stocks slipped when President Trump’s health-care reform bill ended in failure.
Investors looking for clues about the future of monetary policy in the eurozone were kept waiting, as the European Central Bank (ECB) left policy interest rates unchanged in July and gave very little away regarding the outlook of its quantitative easing (QE) programme beyond 2017.
On a sector level, the telecommunications sector was the strongest performer in July. After lagging in June given the introduction of a new regulation that eliminated retail roaming charges in the EU, the sector rebounded strongly, buoyed by strong sales and earnings surprises.
The financials sector was also a leading outperformer this month. Meanwhile, the healthcare sector was the biggest detractor followed by the industrials sector.
On the macroeconomic front, the euro-area economy maintained its steady and broad-based expansion. Private sector activity surveys continued to indicate robust growth across the manufacturing, services and composite sectors of the economy.
Data released in July showed eurozone industrial production (excluding construction) growing 4% year-on-year, a level not seen since 2011, and up from 1.4% in June.
Meanwhile, eurozone unemployment continued to edge lower, reaching 9.1% and underpinning domestic demand.
Given the strengthening growth indicators, inflation remains a key factor in determining the future path of monetary policy in Europe. In July, headline inflation stayed constant at 1.3% in the eurozone, while core inflation ticked up to 1.2% from 1.1% in June.
Asian equity markets continued to rally in July on positive earnings revisions, solid global growth and a lift in risk appetite as the US Federal Reserve signalled gradual interest rate hikes.
In China, the equity market rose over the month, helped by encouraging economic data. In particular, second quarter GDP grew by 6.9% year-on-year, which was ahead of expectations.
Elsewhere, Indian equities continued their strong momentum, outperforming the region.
Although the Korean equity market also made gains, it underperformed the region partly due to a noticeable correction in tech stocks, as the market began to anticipate the end of a market upturn.
The performance of other markets also lagged. For example, Taiwan’s market ended the month only marginally higher, as 2018 earnings per share forecast revisions turned modestly negative, while in Australia, the market was almost flat as industrial stocks with overseas exposure suffered from a sharp rise in the Australian dollar
Finally, most major commodity prices rallied during the month, driven in part by a weakening US dollar and strengthening Chinese economic data.
Emerging equity markets performed strongly in July, drawing support from improving fundamentals and encouraging news on the corporate earnings front.
The best performing region was Latin America, followed by EMEA (Europe, Middle East and Africa).
All emerging market sectors except healthcare gained ground, with materials and technology registering the biggest gains.
Equity gains in the EMEA region were led by Hungary and South Africa. For the first time in five years interest rates were reduced in South Africa as the economy grappled with recession and increased political uncertainties.
Confidence towards Russia was dented by moves from US lawmakers to impose stronger sanctions on the country, although they have not yet been finally approved.
Japan’s equity market edged higher in July, ending the month with a small positive return in local currency terms.
Japanese companies made a strong start to the first quarter earnings reporting season, and results so far have generally been pretty solid.
A number of companies also raised their full year earnings guidance earlier than is usually expected. However, positive equity market momentum was tempered by rising global interest rates and the ruling Liberal Democratic Party’s heavy defeat in the Tokyo Metropolitan Assembly election.
Economic data shows a virtuous cycle unfolding between gradually rising incomes and consumer spending, supported by labour market tightness (more jobs than workers, resulting in low unemployment).
However, while growth remains above trend, inflation remains weak, and the Bank of Japan cut its inflation forecast and pushed back the date for when it expects to achieve its 2% target to around 2019
At the start of the month, news that Mario Draghi would attend the Central Banker’s symposium in late August seemed to confirm the aggressive tone of late June. The last time Draghi spoke at the event, he used the opportunity to prepare the market for the start of quantitative easing (QE). Speculation therefore mounted that he would use this year’s speech to prepare markets for the tapering of asset purchases (tightening of monetary policy).
Against this backdrop, the European Central Bank’s (ECB’s) policy meeting on 20 July became an important focus for the market. In the subsequent press conference Mr Draghi made a number of comments consistent with maintaining economic stimulus. However, he also did not deviate from his earlier message that a tightening of policy was on the horizon.
In the US, the Federal Reserve (Fed) Chair, Janet Yellen, made her semi-annual testimony to Congress, commenting that they may not need to hike interest rates much more. There was however, further confirmation that the Fed expects to start reducing the size of its balance sheet this year as it seeks to normalise US monetary policy.
Data released during the month appears to have given central banks some breathing space, with inflation decelerating across most major markets. This softening of data was attributable to falling oil prices.
The softening of inflation data and tempering of central bank rhetoric helped corporate bond markets to outperform government bonds.
Financials were once again the best performing part of the corporate bond market, with the highest returns from subordinated financial bonds.
What do we think?
It’s always the case that news stories like Brexit negotiations stalling, the actions of the North Koreans, the daily travails of the leader of the Western World, terrorist attacks and housing market slowdowns can grip us and make us fear the worst. Our instinct to fear loss more than we’re driven by the prospect of gains means we can be drawn to negative words in the financial press forecasting the next investment market slump. History tells us that downturns will reappear but even when there are doomsday predictions and worrying news flow, the truth is that none of us know what will trigger the next downturn or when it will occur.
2017 is proving to be a resilient year for stock markets so far. For now, the good returns are adding weight to the argument that as we cannot call the short-term direction of markets, when investing for the medium to long term, it’s best just to strap yourself in for the ride.
Date of next meeting: 22nd September 2017
The UK equity market retreated in November, only the second month in 2017 where we saw a meaningful fall in the key FTSE 100 Index. Comments made by Mark Carney, following the November Base rate rise, highlighted the Bank’s view that inflation will be a problem for some time to come and how business and consumers react to this will determine the path for the UK economy over the coming months. The Bank said in a statement: “The decision to leave the European Union is having a noticeable impact on the economic outlook.
The Bank of England’s decision at the start of November to raise interest rates for the first time in 10 years was widely expected and caused little initial stir in the markets. Since then the FTSE 100 has fallen a couple of percentage points at the time of writing. Perhaps the combination of negative talk around Brexit combined with the prospect of rising interest rates are starting to bring back a little fear to the market which has, for some time, felt like it has been in a state of complacency.
Most commentators expect interest rates in the UK will rise for the first time since July 2007 when the Monetary Policy Committee (MPC) of the Bank of England next gets together for its monthly meeting on 2nd November 2017. Indeed, Mark Carney said on the BBC Today programme, shortly after the minutes of last month’s meeting were released, “What we have said is that if the economy continues on the track that it has been on - and all the indications are that it is - in the relatively near term you can expect that interest rates will rise”. He went on to say, “We are talking about just easing a bit off the accelerator to keep with the speed limit of the economy”, which has been widely predicted to mean that rate rises will be gradual and measured.
Our reason for showing these graphs is to highlight that the VIX index is trading back at 2007 levels of low volatility while stock markets are at all-time highs. We can no more see the future than anyone else but we do know that when it comes to investing, the most money is often made when every sinew in your body is screaming that it is madness to invest, and that sometimes the opposite is true.
It has been a strong start to the year for investment portfolios, mostly driven by signs of continued strength in the US Economy and the promise of more to come under the Trump presidency. Markets always move ahead of the economy so to make money, investors will position portfolios to benefit from what they think is around the corner. But what if the promise does not materialise? One fund manager described this recent wave of enthusiasm as the “Trump Bump” and that this may well be followed by the “Trump Dump” if the new President is unable to deliver on his campaign promises due to lack of support from political colleagues. In this respect, it seems that the failed repeal of Obamacare has given investors pause for thought over the last week or so.
While some asset classes are looking expensive, on an individual basis, there remains optimism amongst fund managers. Those who particularly seek to invest in undervalued, unloved but robust companies can see plenty of scope for increased valuations in their investment pool.
Eight years have now passed since the FTSE 100 hit its Credit Crunch low point. In investor memory, particularly among younger investors, we are getting to the point when the slide that started in summer 2007 down to its nadir risks being forgotten. We don’t know what the future holds but the past tells us that investing needs time on your hands to ride out the tough times. We’re confident that investing remains the best long term strategy for your money but make sure that you understand the strategy you are taking and that your portfolio is right for your attitude to investment risk and your time frame.