Investment Comment July 2018

Global markets continued to recover from the February correction in the second quarter, with the MSCI World (ex UK) returning 6.7%.  In the UK, markets returned 9.3% in the second quarter compared to a 6.5% decline in the three months to March.  Emerging markets experienced the most significant decline, down 2.2% on the quarter whilst property recovered from a first quarter low of -2.1%, returning 3.6% in the three months to June.

In the US, President Trump approved tariffs on $50bn worth of Chinese imports in June to come into effect in July 2018.  China retaliated with tariffs on products worth $34bn.  Economists believe that the direct impact of the tariffs on the economic growth of both countries will be modest but may weigh on global business confidence.

The US economy continues to flourish, with economic growth early in the second quarter accelerating at the fastest rate in over three years, reflecting strong demand from its large domestic market.  IHS Markit data show a strong order book, suggesting US growth is likely to continue to remain strong in the coming months.

With US core inflation currently at 2.2%, up from 2.1% at the start of the quarter, and unemployment levels at 3.8%, the lowest level since April 2000, the Federal Reserve expressed their confidence in the US economy and raised interest rates to 2%.  The Fed expects unemployment to continue its downward trajectory towards 3.6% by the end of 2018 and signalled a high probability of two further rate rises throughout the year.

According to the International Monetary Fund’s (IMF) forecast, the US is on course to experience GDP growth of 2.9% in 2018 and 2.7% in 2019. Interestingly, they do not entirely share the Fed’s sentiment on the US economy, as their forecasts do not show a long-term boost in economic growth resulting from tax cuts.  The IMF expects GDP growth to revert to its long-term trend of 1.75% by 2021, citing risks associated with unsustainable rises in public debt, which they expect would exceed 90% of GDP by 2025.

The second quarter saw the Bank of England (BoE) keep UK interest rates unchanged at 0.5%, citing easing inflationary pressures as well as subdued growth data releases through the first-quarter.  BoE Governor Mark Carney remains confident that the overall UK economic climate looks little changed thus far and that poor first quarter growth data reflect a temporary soft patch.  Following the slow start to the UK retail sector in the first quarter, retail spending improved in May when the British public spent more than expected. Economists forecast annual spending growth to increase from 1.1% in the first quarter to 2% by early 2019.

UK manufacturing output continues to show growth, with the PMI index rising further to 54.4 in May, up from 53.9 in April, which signals that the UK economy is regaining momentum.  UK house prices experienced a sharp recovery in May, up 1.5%, following a 3.1% decline in April. Mortgage approvals by British banks hit a four-month high in May but are still down 4% from one year earlier.  Even with mortgage approvals softening in the first quarter, interest rates remain low and mortgage affordability is at manageable levels, providing further support to UK house prices.  UK Inflation remained unchanged at 2.4%, despite consensus forecasts of an increase to 2.5% in May, and the employment rate of 75.6% is at its highest level since 1971 (unemployment currently at 4.2%).

After a month of uncertainty during the composition of the populist coalition government in Italy, Eurozone markets started to calm down when Giovanni Tria, the finance minister of Italy, remarked that there is no discussion or proposal to exit the euro. He further commented that the materialisation of market conditions that would lead to such a decision will be avoided.

Overall, the eurozone experienced a widespread gain in business momentum, although failing to fully recover the rate of expansion seen earlier this year.  The IHS Markit Eurozone Composite PMI improved in June but represents the second-weakest expansion observed over the past 17 months, highlighting an ease in the pace of Eurozone business activity.  Even though economic growth has cooled, it remains above the historic trend and corporate earnings are growing at a healthy pace.

Asian market analysts believe that fears surrounding trade negotiations between China and the US are overdone, with the consensus positive on the Asia-Pacific market outlook after the rest of Developing Asia showed good resilience to a stronger Dollar. Investor sentiment on Japan remains mixed as strong corporate performance is offset by weak consumer data, while rising real wages are expected to provide support for household sector recovery.

Global growth continues its upward trajectory, and tailwinds outweigh headwinds for now, however, a shift in the balance is expected throughout the remainder of 2018.  We continue to advise our clients on the importance of holding a well-diversified portfolio and taking a long-term view on their investment returns.  We continue to see attractive opportunities across global markets.

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.