Investment Comment February 2017
2nd February 2017
Markets were mixed in January, with several major indices breaking records and others dropping back after recent rallies. The Top UK 100 Companies delivered an unprecedented 15 consecutive sessions of gains, hitting an all-time high on 13 January. The Dow Jones industrial Average broke through 20,000 for the first time on the 25 January, with the S&P 500 also hitting a record high. The Eurostoxx 50 closed the month down 1.82%, with the Nikkei 225 flat.
The UK was the fastest growing economy in the G7 in 2016, with GDP up by 0.6% in Q4 to deliver 2% growth for the year. Growth was supported by strong consumer spending, with consumer borrowing increasing at its fastest rate for more than a decade in December, growing by 10.8% in 2016. The construction sector recovered from a weak summer, with housebuilding, civil engineering and commercial construction all increasing in December. However, the prices of imported inputs continued to rise, with input price inflation at its highest level for over five years as the impact of Sterling depreciation was felt. Inflation rose to 1.6% in December, driven primarily by air fares, food and petrol. This left CPI increasing at the highest level since 2014, and above the consensus forecast of 1.4%. Wage growth again accelerated, up from 2.6% in November to 2.8% in the three months to December. CBI figures for January showed a slowdown in UK retail sales, with almost a third of retailers surveyed reporting a decline in sales volumes in the year to January, compared to 23% reporting an increase. UK retail is expected to face headwinds in 2017, with inflation expected to hit consumer spending. UK house price growth picked up in November, with a 1.1% rise, bringing annual growth to 6.7%.
Political events in the US continued to cause controversy around the world. Donald Trump was inaugurated as the 45th President of the United States on 20 January. The first weeks of his Presidency have been politically volatile. After choosing Robert Lighthizer – a long-time advocate of protectionism – as his US trade representative, the President threatened that US companies would face stiff import taxes if they imported foreign-made goods. Ford subsequently abandoned plans to build a $1.6bn plant in Mexico, opting instead for a $700m investment in a facility in Michigan. The US has been pulled out of the Pacific Trade Pact in a demonstration of unilateral Presidential power. In a move demonstrating that the President may attempt to fulfil his campaign promises, an executive order was signed putting into motion the building of a wall on the border with Mexico. Perhaps less expected was the travel ban placed on individuals from seven countries. The executive order was blocked by a federal judge as the government attempted to deport migrant refugees who had been detained at US airports. The President fired the acting attorney-general for opposing the ban, but now faces a significant legal challenge brought by some of the largest US tech companies – including Apple, Facebook, Google, Intel and Netflix, amongst dozens of others – who would be particularly hard hit by restrictions on foreign employees.
US economic data continued to look strong. US wage growth in December accelerated to the quickest pace since 2009, leading to a rise in Treasury yields as investors predicted a period of higher inflation ahead. Whilst interest rates were left unchanged in the first two meetings of the year, the Federal Reserve has indicated that an expectation for three rate increases this year is ‘reasonable’. US small business optimism – as measured by the National Federation of Independent Business sentiment index – surged to the highest level since 2004 in a sign that business leaders expect the Trump Presidency to be good for business.
Data from the housing market was mixed. US mortgage applications rose sharply in the first week of the year as lending rates dipped. US new home sales declined 10.4% in December compared to November, well below market expectations of a 0.7% fall. New-home construction rose sharply in December, with housing starts up 11.3% compared to a 16.5% fall in November. The housing market is expected to be supported by continued strong employment. The US economy added 227,000 jobs in January, well above market expectations of 180,000.
The Eurozone economy posted some strong figures to start the year. Eurozone growth in the fourth quarter of 2016 was 0.5%, with a 2016 rate of 1.7% - ahead of the US at 1.6%. The Eurozone has now posted 14 consecutive quarters of growth, with economic sentiment at its highest level in almost 6 years. However, there remains divergence within the Eurozone, with German inflation rising to its highest level since 2013 at 1.9% and Greek bond yields once again rising following a warning from the IMF. The spread between French and German bond yields rose to its highest level since 2014 as the French presidential election continues to be too close to call. We continue to expect volatility in Europe as political events for the year play out, but with the potential for a positive outcome for investments because valuations are favourable.
In China, foreign exchange reserves dipped below $3tn for the first time since 2012, but outflows were stemmed by tighter capital controls and a stronger renminbi. The 1% recovery in the value of the renminbi was in line with a broader downward move in the level of the US dollar following a strong end to 2016 with a US rate rise. The Bank of Japan intervened to keep 10-year JGB yields below 0.11% in an action aimed to halt an upward drift in the Japanese yield curve.
In UK commercial property, premiums on Real Estate Investment Trusts have returned suggesting a more positive outlook for property compared to the large mark downs in mid-2016. With the prospect of future interest rate rises, we continue to be cautious on fixed interest investments with allocation to shorter durations where capital redemption offers some downside protection.
Politics continue to take centre stage at the beginning of the year, but developed economies remain robust. We are starting to see some indicators of a turn in the cycle, particularly in the UK, but remain cautiously optimistic for the year ahead. We continue to believe that remaining invested in a portfolio of diversified assets is the best way to benefit from potential future growth.