Detailed Market Outlook Report – May 2017

Market Overview

Stock Market

The FTSE 100 touched another record high last week, driven by shares in commodity companies, which were boosted by China’s pledge to spend $124 billion on global infrastructure projects. The price of Brent crude rose to $53.49 a barrel, helped by a Saudi-Russian agreement to extend production cuts for nine months.

The FTSE 100 broke through the 7500 barrier last week.

The Conservatives released their manifesto and business groups expressed surprise at the proposed level of industry oversight/regulation. Measures include scrutiny of telecoms, defence and energy companies to stop foreign ownership affecting national security; plans to stop foreign companies buying and asset-stripping UK businesses; and handing shareholders binding votes on executive pay.

Economists continue to warn that UK households are under pressure from rising inflation, the fall in sterling and faltering wages.

The dollar fell to a six-month low last week, as it emerged that President Trump tried to block an FBI investigation into his ties with the Kremlin. The end of the eight-year bull-run in US equities has been called, with growing unease and speculation over the US Trump administration (see further detail below).

UK Economy

Almost a year after Britain voted to leave the EU, signs are emerging of a slowdown in business activity. Whether Brexit ultimately leads to a more vibrant economy in years to come is unknown; accurate predictions are difficult to make due to the opaque and unprecedented nature of the negotiations that will come. Meanwhile, companies are being forced to take short-term decisions in an environment of uncertainty.

If businesses are choosing to sit on their hands against the backdrop of an unknowable future, that could lead to a slowing economy during the crucial two-year negotiation period.Overall business investment fell by 1.5% last year — the first annual decline since 2009. There has been no official data so far this year, but surveys suggest that there has been little improvement. Last week’s official data showed the economy grew by a paltry 0.3% in the first quarter. That suggests investment is failing to offset a consumer slowdown.

Overseas investors continued ploughing money into Britain last year, with foreign direct investment soaring to £197bn, up from £33bn in 2015, according to the OECD.

The stage is set for complicated and tough talks between Britain and the 27 remaining EU countries. German chancellor Angela Merkel has warned Theresa May and her colleagues not to harbour any “illusions” about an easy separation because “that would be a waste of time”.

Since last June’s Brexit vote, some European cities have tried to persuade financial services companies to move operations and staff out of London. According to Frankfurt officials quoted in German media reports, at least seven banks based in London have decided to open offices in the German city, with a further 20 said to be in advanced talks to relocate some staff. Amsterdam, Dublin, Luxembourg and Paris have also been named as potential destinations for some jobs currently carried out in Britain.

Shoppers and retailers have already been squeezed by inflation caused by the weaker pound, which has fallen 13.4% against the dollar since the Brexit vote, making overseas goods more expensive. However, the pound has recently regained some of it’s earlier losses, both against the dollar and the euro.

Effect of leaving the EU in numbers

  • 1.5% The drop in business investment in 2016, the first annual fall since 2009
  • 0.3% The lower-than-expected UK growth figure for the first quarter
  • 4,000 The number of Deutsche Bank jobs that may be moved from London

Following recent news that the economy faltered in the first quarter, a pre-Brexit interest rate rise looking increasingly unlikely, despite inflation being above the Bank’s 2% target and expected to rise further. Mark Carney, who is due to stand down in June 2019, may serve his entire six years as governor without lifting rates.

The economy grew by just 0.3% in the first quarter, against the Bank’s expectations of a 0.5% rise, as the weaker pound pushed up prices, driving consumers to cut spending.

Along with weak first quarter growth figures, there is little sign that wage growth is picking up, suggesting inflation is a consequence of the weaker pound not a homegrown phenomenon.

Financial markets are now pricing in a rise in Bank rate to 0.5% in spring 2019. It may well be that Mark Carney will not see an interest rate rise throughout his tenure as Governor of the Bank of England, which ends in June 2019.

Activity in the manufacturing sector made a surprise rebound in April as it surged to a three-year high boosted by strong demand at home and abroad, according to a closely watched survey. Economists said that the “overwhelmingly upbeat” manufacturing survey was welcome news after economic growth slowed sharply in the first three months of this year. The purchasing managers’ index for manufacturing, considered one of the best indicators of growth in the sector, rose to a balance of 57.3 in April, the highest since April 2014 and up from March’s four-month low of 54.2. Any balance above 50 signals growth, while below signals contraction. The manufacturing sector has remained above 50 since August last year.

In another report, the UK manufacturing sector has hit a three-year high thanks to the fall in the pound boosting exports and a wider revival in world trade. The CBI’s industrial trends report said that output for the three months to May was at its highest since December 2013, underpinned by strong demand in the mechanical engineering and chemicals sectors. Manufacturers expect another rise in production in the next quarter.

UK Inflation

Monthly inflation rate figures for the United Kingdom are reported by the Office for National Statistics

Consumer prices in the United Kingdom increased 2.7 percent year-on-year in April of 2017, following a 2.3 percent rise in each of the previous two months and above market expectations of 2.6 percent. It is the highest inflation rate since September of 2013, mainly due to rising air fares and electricity prices. The inflation rate has been on an upward trend since the Brexit vote last year due to a fall in the sterling value. Inflation Rate in the United Kingdom averaged 2.58 percent from 1989 until 2017, reaching an all time high of 8.50 percent in April of 1991 and a record low of -0.10 percent in April of 2015.Rising bills for household energy and imported goods meant consumer prices jumped 2.7 per cent in the year to April, up from 2.3 per cent in the year to March, to post the highest rate of inflation since September 2013. Prices are outstripping earnings, which rose by 2.3 per cent in the latest official data.

Europe

The eurozone has been recovering strongly for more than a year, posting faster growth in the first quarter of 2017 than the UK and America. Inflation is at the target rate of 1.9 per cent but the central bank shows no signs of slowing its stimulus programme. Its key interest rate is at zero and it is buying €60 billion of bonds a month under a quantitative easing scheme not due to end until December. However, the president of the ECB, Mario Draghi, has warned that Europe’s weak jobs market remains a big obstacle to higher interest rates as he defended the European Central Bank’s cheap money policy. Mr Draghi acknowledges that the eurozone economy was strengthening but said it was “too early to declare success” in the fight against low inflation.

We have maintained our proportionate asset allocation within our selected European funds (JPMorgan European Smaller Comp Ord, Lazard European Smaller Coms C Acc, Schroder European Sm Cos Z Acc & Threadneedle Eurp Smlr Coms Z Inc GBP), which continue to perform well, with the prospect of further growth.USA surprise fall in US unemployment to its lowest level in a decade and a sharp rebound in hiring have strengthened the case for the Federal Reserve to raise interest rates. Non-farm jobs increased by 211,000 in April, greater than economists’ forecasts and a big turnaround from the 79,000 gain reported for March. Unemployment dipped to 4.4 per cent last month, the Department of Labor announced. Last Wednesday (03 May), the US Federal Reserve held interest rates. Economists said that yesterday’s jobs numbers meant rates were almost certain to go up next month and were likely to rise again in September.

Last week, the dollar suffered its worst weekly slump in a year amid fears for Donald Trump’s presidency and in the face of a resurgent euro. It tumbled to its lowest level since the property magnate was elected.Against a trade-weighted basket of six currencies, the dollar slid by almost 2 per cent this week, wiping out all the gains of the “Trump bump” since November 9. It was the steepest weekly fall since April 2016, dipping 0.6 per cent in one day alone.Investors have dumped the dollar after the uproar over Mr Trump’s decision to fire James Comey, director of the FBI, and amid allegations of links between the president’s team and Russia.

Analysts said that the sell-off had been sparked by fears of a political fallout that could delay or derail the president’s fiscal stimulus plans, which have underpinned Wall Street’s rally over the past six months and had raised confidence in the economy.

Donald Trump’s pledge to grow the US economy by up to 4 per cent a year has been dealt a blow by official figures, which suggest that growth in the first three months of the year had been the weakest since 2014. First-quarter GDP climbed by 0.7 per cent on an annualised basis, below expectations of a 1.1 per cent increase. Growth in consumer spending, the driving force behind the US economy, fell to 0.3 per cent, its lowest level since 2009.

There was a surprise fall in US unemployment to its lowest level in a decade and a sharp rebound in hiring have strengthened the case for the Federal Reserve to raise interest rates. Unemployment in the US dipped to 4.4 per cent last month. Prior to this announcement, the US Federal Reserve has held interest rates unchanged earlier in the month. The latest US jobs figures prompted economists to predict that interest rates are almost certain to go up next month and are likely to rise again in September. However, last week’s market turmoil pushed the chance of a rate hike at the Fed’s next meeting in June down to 70 per cent, from nearly 88 per cent the previous week.

US unemployment rate fell to the lowest level in a decade.

Reeves Independent isn’t having to react to growing political unease concerning the Trump administration’ having already proactively pre-empted it by reducing our exposure to US equities, following our monthly Investment Team meeting in March.

Gold

The Trump administration’s promised infrastructure boom and the threat of US interest rate rises has quelled demand for gold, despite a recent clamour for safety by Chinese investors. Recent figures released by the World Gold Council showed that global demand fell 18 per cent in the first quarter after 2016 when the Brexit vote, European banking jitters and uncertainty over the US election pushed demand to a quarterly record.

Last year the demand was driven by institutional investors pouring money into exchange-traded funds (ETFs). This year however, demand for gold through ETFs dropped by 68 per cent to 109 tonnes in the first quarter.

ETF demand has fallen back sharply, while consumer demand for physical gold has made up some of the shortfall.

Alistair Hewitt, head of market intelligence at the World Gold Council, which represents producers, said: “Demand is down year-on-year, but that is largely because the first quarter of last year was exceptionally high.“Although we did not see the record-breaking surges in ETF inflows experienced in the first quarter of 2016, we have seen good inflows nonetheless this quarter, with strong interest from European investors ahead of the Dutch and French elections. “China led the way with bar and coin demand surging 30 per cent, breaching 100 tonnes for only the fourth time on record, fuelled by concerns over potential currency weakness and a frothy property market.”

The premium of Chinese bullion prices to the global spot price has risen markedly since the end of last year. Jewellery demand remains weak despite signs of a recovery in the huge Indian market, where demand was hammered by the government’s sudden withdrawal of high-value banknotes.In a note to clients, analysts at Goldman Sachs said it expected the price to drift to $1,200 an ounce in the coming months because “a number of bearish catalysts have yet to fully play out”.

Last week’s market turmoil pushed the price of gold up by 1.4 per cent to $1,254.42 in one day.Given the ongoing political, economic and market uncertainty, Reeves Independent is retaining the ETFS Physical Gold holding as a core component in the model balance investment portfolio.

Oil/Energy

Soaring output from America’s shale oil producers is threatening to unstitch the blanket of support within Opec for cuts to the cartel’s production. Opec members led by Saudi Arabia will meet in Vienna on May 25 to decide whether or not to extend a deal introduced in January to cut oil output by 1.2 million barrels per day and in turn increase or at least support prices.American crude oil production rose above 9.2 million barrels per day in April, up from an average of 8.9 million barrels per day in 2016, according to the US Energy Information Administration. Moreover, it predicts that US output will swell to 9.9 million barrels per day in 2018, enough to effectively cancel out the bulk of Opec’s cuts introduced at the start of this year.

US oil producers spent $4.9 billion on new oil projects during the final three months of last year, the biggest rise in quarterly spending since at least 2012, as companies took advantage of a bounce in prices since the Opec deal was announced on November 30 to restart stalled drilling operations. There were 857 drilling rigs active in the United States the week of April 21, an increase of 426 on the same week a year ago, according to Baker Hughes, the oil services company.

Meanwhile, growing output from Libya, an Opec member that has been exempted from the cuts because of a domestic conflict, is also adding to plentiful supplies.

Ministers of the 13 member states of the oil exporters’ group, which pumps a third of the world’s oil, will gather in Vienna on Thursday 25 May for a biannual policy meeting. The 13 Opec member states are likely to be joined by other producer nations, such as Russia, which also pledged to help by trimming their own combined output by a further 600,000 barrels per day. Opec may make further production cuts and extend an existing deal to curb oil output for a further nine months as it battles to prop up global prices in the face of a resurgent American shale industry.

Although the price of a barrel of Brent Crude is trading well above the lows of below $30 struck in early 2016, prices are still half the levels of above $110 seen in 2014.

Reeves Independent retains a core holding in the ETFS Brent Oil 1 month ETC as part of its diversified model balance investment portfolio.

Version 17D Balanced

NameTotal Ret
1 Mo
(Daily)
Total Ret
3 Mo
(Daily)
Total Ret
6 Mo
(Daily)
Total Ret
1 Yr
(Daily)
Schroder European Sm Cos Z Acc7.2316.5626.3844.13
Henderson Global Technology I Acc6.167.9219.3354.34
Baillie Gifford Shin Nippon Ord6.036.0815.0726.90
AXA Framlington Global Technology Z Acc5.957.0515.9855.38
Threadneedle Eurp Smlr Coms Z Inc GBP5.8915.0726.5037.10
Lazard European Smaller Coms C Acc5.4412.5822.6831.81
JPMorgan European Smaller Comp Ord5.0214.9824.0437.37
Marlborough Special Situations P Acc4.3912.6023.5829.19
IP High Income Acc4.007.3312.2714.79
TR Property Ord3.787.3916.1814.21
Fidelity Special Situations W Acc3.077.8114.8225.33
Jupiter Financial Opportunities Inc2.872.048.5325.32
Empiric Student Property PLC2.624.629.5512.33
Liontrust Special Situations I Inc2.585.4115.2425.24
MedicX Ord2.572.996.6814.42
Tritax Big Box2.543.785.1412.76
JPMorgan Mid Cap Ord2.3612.5719.1218.01
Summary1.964.2311.1824.18
Target Healthcare REIT1.571.274.735.52
AXA Framlington Financial Rl Acc1.341.659.5539.79
BlackRock Frontiers Ord1.232.2312.7637.32
Threadneedle UK Prpty Authrsd Invmt IGA0.551.919.217.56
F&C UK Property 2 inc0.55-0.071.961.36
Aberdeen UK Property I Acc0.501.553.94-0.81
iShares Core S&P 500 USD (Acc)0.09-1.635.8732.96
Investec Cautious Managed I Acc Net0.09-0.524.0815.89
GCP Student Living Ord-0.07-3.255.576.60
AXA Framlington Biotech GBP Z Acc-0.43-1.680.2021.25
Jupiter North American Income Acc-0.54-3.793.3129.37
Schroder US Mid Cap Acc-0.73-2.362.2533.24
Fidelity American Special Situations-1.11-4.23-1.3026.08

A proportionate Cash holding is retained within the diversified balanced investment portfolio, as a part of an underlying risk mitigation strategy. The proportion is adjusted from time to time and during this month’s Investment Team meeting, it was decide to reduce the cash balance for investments in a basket of selected quality investment trusts with excellent investment pedigrees and solid investment prospects for the future. 

Our Clients on Transact will be contacted under a separate cover.

Going forward, Reeves Independent is in discussion with Discretionary Fund Managers (‘DFM’), with a view to them taking over the bulk of our strategic investment portfolio decisions. If this proposal goes ahead, subject to your express consent, you will be able to rely on swift action by the appointed DFM to make appropriate changes your investment portfolio, without the need for us to communicate suggested changes and you to access, digest and respond to those communications. Further information regarding this proposed change will be communicated in due course.