Investment Comment February 2016
3rd February 2016
The oil price continued to drive investment sentiment as 2016 got under way. For the opening weeks of the year oil continued to sell off, with Brent Crude dropping below $30 per barrel. However, it has since recovered and almost reached its year-opening price towards the end of January. The Top UK 100 Companies is heavily weighted towards commodities companies, and so the volatile oil price (along with other commodity prices) has weighed on its performance. Broadly it has mirrored oil price movement by dropping as the year began and then beginning to recover.
Looking in more detail at the UK economy, there was cause for optimism. PMI numbers in January were better, with Manufacturing PMI up significantly to 52.9 (compared to 51.9) and Services PMI up slightly to 55.6 (versus 55.5). Consumer confidence was also up with a reading of 4 (compared to a previous reading of 2), the highest January reading since the 2008 crisis. The Bank of England also looks likely to continue its accommodative monetary stance, with Mark Carney signaling interest rates are now unlikely to rise this year. Concern persists that when rates do rise this will cause defaults among those who have become over-leveraged. On balance, though, the signs point to continuing good performance for the UK economy.
In company news, the shareholders of Royal Dutch Shell and BG Group voted to approve the previously announced merger. Melrose completed its share consolidation, including returning 254p per share to shareholders. Following commodity price movements over the last year, BP announced its worst ever results with a loss of $5.2bn. In contrast, Persimmon announced that its revenue had increased 13% year on year as the buoyant housing market continued.
European economic news was mixed. Although Eurozone unemployment dropped to its lowest level since September 2011, at 10.4% it remains above pre-crisis levels. There are also concerns that the drop is being driven by the strong northern countries, with unemployment remaining much higher in southern Europe. In a more positive sign, Mario Draghi, President of the European Central Bank, indicated that the ECB will continue to support the Eurozone economies with loose monetary policy, potentially including further quantitative easing.
In the Far East, the Bank of Japan surprised observers by lowering interest rates to negative territory (the new benchmark rate is -0.1%). This action will, the BoJ hopes, stimulate activity in the Japanese economy, both helping to support the economy as other Asian countries face turbulent times and increase inflation, pushing the country towards the 2% inflation target.
Although the Federal Reserve did not raise interest rates this month, the US continues to be the only major developed economy to have begun a tightening cycle. This is having a significant impact on the currency. Since the first increase in US interest rates on 16 December 2015, the US Dollar has strengthened from 1.49881 to 1.44554 against the Pound Sterling. According to reports from Wolseley, the plumbing and heating company, the US housing market is beginning to cool: this may be a relief to some who worried about the potential for another bubble if previous trends continued. Despite this, consumer confidence edged higher to 93.3 (compared to 93.1), indicating continuing strength in consumer spending to support the economy.
The global economy presents a mixed picture, with a wide range of economic performance. This highlights the need for a diversified portfolio, as recommended by Cantab Asset Management. Diversification can provide protection from underperforming regions, exposure to countries which may be about to begin fast growth and allow investors to benefit from those economies which are currently performing strongly.