Investment Comment July 2017

Markets pulled back in June after a strong month in May. The Dow Jones Industrial Average (+0.97%) stood out as the only positive performer amongst developed market indices. The S&P 500 Index (-0.27%) outperformed the Nasdaq (-2.92%) as profit-taking from technology stocks weighed on investor sentiment. In the UK, the Top UK 100 Companies (-3.06%) gave back most of last month’s gains. The same was true across much of Europe, with the German DAX (-2.68%), French CAC (-3.72%) and Spanish IBEX (-3.77%) all retreating.

In the UK, commentary focused on political issues after the General Election. In particular, Brexit negotiations were once again the subject of much analysis, despite a lack of any concrete development in the process. Fundamental economic data continued trends seen in May. Growth in UK manufacturing activity – as measured by the Purchasing Managers’ Index (PMI) – fell to 54.3 (relative to consensus forecasts of 56.5). The UK Construction PMI (down from 56 in May to 54.8 in June) and UK Services PMI (down from 53.8 in May to 53.4 in June) followed the same path, although it is worth noting that all indices remain comfortably above the 50 level indicating expansion.

UK markets were rattled by an unexpectedly close vote on whether to raise interest rates at the Bank of England’s June Monetary Policy Committee (MPC) meeting. Although a majority five (to three) committee members voted to keep rates at 0.25 percent, commentary suggested that inflation ‘is likely to remain above the target for an extended period’.

In contrast, industry expectations for future growth in Eurozone economies continue to be strong. The Eurozone Manufacturing PMI hit a new high, rising from 57 in May to 57.4 in June. Austria topped the table, with a reading of 60.7, a 76-month high. Even Greece indicated expansion, with a PMI reading of 50.5, a 37-month high. However, eurozone inflation fell from 1.4 percent in May to 1.3 percent in June, significantly below the European Central Bank (ECB) target of ‘just under 2 percent’. Strong potential growth and weak inflation present an unusual challenge for policymakers as they start moving towards reversing the monetary stimulus still in place after the Global Financial Crisis.

In the US, the Federal Reserve raised rates for the second time this year from 1 to 1.25 percent. The move was widely anticipated despite weakening inflation numbers and consistent with relatively strong job growth, household spending, and business fixed investment data since the beginning of the year.

In Japan, first-quarter GDP growth was revised down to 1 percent from an initial estimate of 2.2 percent. The revision was primarily driven by a lower estimate of inventory accumulation by private companies. Business investment was revised upwards from a 0.1 percent contribution to growth to a 0.4 percent contribution to growth, a positive indicator of future expansion. The 1 percent growth figure remains above Japan’s long-run average and estimated ‘potential’, implying that spare capacity remains low. Unemployment rose to 3.1 percent, with the ratio of open jobs to applicants hitting a 43-year high in May of 1.49.

Brent crude oil prices fell back towards $45 a barrel after relative stability year-to-date. Hedge fund net short positions (the volume of long minus the volume of short futures and options contracts taken by hedge funds in Brent) jumped to the highest level on record, indicating that funds had lost faith in the oil price rally. However, at the end of the month, prices rebounded to close June at around $48.

We continue to receive regular questions from clients about the future prospects for equity markets. Whilst we are starting to see some signs of a slowdown in fundamental UK economic measures, we continue to see attractive potential for global growth going forward.

The potential for a (relatively) prolonged period of political uncertainty in the UK following the General Election increases our conviction that clients should have exposure to a wide range of geographical equity markets as well as different asset classes. We encourage clients to consider the risks of being uninvested in a low-interest rate, rising inflation scenario.

Risk warnings
This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice, both of which may be the subject of change in the future. The opinions expressed herein are those of Cantab Asset Management Ltd and should not be construed as investment advice. Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority. As with all equity-based and bond-based investments, the value and the income therefrom can fall as well as rise and you may not get back all the money that you invested. The value of overseas securities will be influenced by the exchange rate used to convert these to sterling. Investments in stocks and shares should therefore be viewed as a medium to long-term investment. Past performance is not a guide to the future. It is important to note that in selecting ESG investments, a screening out process has taken place which eliminates many investments potentially providing good financial returns. By reducing the universe of possible investments, the investment performance of ESG portfolios might be less than that potentially produced by selecting from the larger unscreened universe.