Investment Comment January 2017

Markets were strong in December to close a year of positive equity returns across the major indices. The Top UK 100 Companies rose 5.37%, registering losses on just 4 of 19 trading days, bringing the 2016 total return to 19.07%. The EuroStoxx 50 closed up 7.90% in EUR (8.49% in Sterling) to end the year at a 12-month high. The S&P 500 had a strong start to the month before fading, but still registered an 11.23% gain for the year in USD (32.67% in Sterling). The Nikkei 225 continued its strong run since the US election, hitting a 12-month high before closing the year up 0.42% in Yen (24.62% in Sterling).

The economic picture in the UK remained broadly positive. Inflation in November was 1.2% year-on-year (up from 0.9% in October), although is widely expected to rise above the Bank of England’s 2% target during 2017. The employment rate in Q3 dipped from 74.5% to 74.4%, whilst unemployment remained steady at its 4.8% 11-year low. Wage growth accelerated from 2.4% to 2.6%; a positive sign which may be overlooked in the face of rising inflation. UK retail sales growth slowed from 1.9% in October to 0.2% in November, driven in part by a 2.1% decline in fuel purchases as prices rose. This was offset by strong growth in sales of household goods and electrical appliances. The CBI reported that retail sales in December grew at their fastest pace since September 2015 but provided a cautious outlook for 2017 as the impact of Sterling’s depreciation and reduced purchasing power from inflation feeds through to consumers. This caution was reinforced by early results from UK retailers, with Next shares sliding 13.8% after a ‘difficult’ end to the year prompted a profit warning. M&S, Debenhams and Associated British Food – owner of Primark – all fell 4-6% as investors feared wider sector weakness.

Activity in UK manufacturing grew at its fastest pace for two and a half years in December, helped by the depreciation in Sterling. The Markit/CIPS survey rose to 56.1, well above the 50 level which indicates expansion. UK car production rose 12.8% year-on-year in November to reach the highest level since 1999.

The housing market started to show signs of a slowdown as policy measures targeting buy-to-let investors impacted sentiment. Data for October released by the ONS showed flat national prices month-on-month, with a fall in London. Year-on-year growth remained strong at 6.9% but expectations are for more subdued growth in 2017. The government continued its plans to increase the supply of affordable housing, with the announcement that construction will begin on thousands of starter homes on brownfield sites using a £1.2bn national fund. This should be supportive of future construction growth, with new construction orders in December showing a fourth consecutive month of expansion and Housebuilding growing at the fastest rate since January 2016. We continue to expect infrastructure investments to perform well in the context of rising inflation and government support. Commercial property returns are expected to reflect rental yields more closely in 2017.

In the US, Donald Trump continued to make political waves. Chinese – US relations were strained by the President-elect’s phone call to Taiwan whilst US multinationals were warned of future tariffs for foreign-made goods. Yet US markets were optimistic, with one of the biggest post-election rallies since 1952 according to the Stock Trader’s Almanac. Fundamental measures continue to suggest a resilient and growing economy. US Treasury yields jumped as the Federal Reserve raised interest rates for just the second time since the Global Financial Crisis. The Treasury Yield curve – depicting yields on bonds of various maturities – saw a parallel shift outwards, indicating that investor expectations for the future health of the economy were not drastically changed despite a rate rise. The Dollar continued to strengthen, with the Dow Jones Dollar Index closing the year at a level not seen since 2002. US manufacturing data for November pointed to a sustained acceleration in growth, whilst the factory sector grew at its fastest rate in two years in December.

Oil prices surged after first Opec then non-Opec producers agreed deals to cut production. Brent crude moved >20% during the month causing global oil stocks to rally. We are optimistic that prices should stabilise at a more sustainable level in 2017 in the wake of the fiscal challenges faced by oil producing nations in 2015/6.

Investors in European banks enjoyed pre-Christmas relief as Deutsche Bank and Credit Suisse reached preliminary settlements with the Department of Justice (DoJ) – for $7.2bn and $5.28bn respectively – over the alleged mis-selling of mortgage-backed securities before the financial crisis. Whilst the payments are significant, they are well below the level feared when the initial DoJ demand of Deutsche Bank was made in September. As an end to scandal and fines finally looks to be within sight for the banking sector, we see global Financials as a potentially attractive area in 2017.

The Euro continued to depreciate against the Dollar, reaching a low of $1.0385, not seen since 2002. We expect that continued political uncertainty in Europe, combined with further monetary tightening in the US will lead to further pressure on the Euro relative to the US Dollar. We see opportunities in EU-listed companies with Dollar-denominated revenues.

China’s Central Bank expanded the number of currencies included in the basket against which it measures the Renminbi in an apparent attempt to reduce the focus on the Renminbi-Dollar rate. The move came as authorities tightened controls on personal forex purchases in an effort to stem downward pressure on the currency.

In conclusion, politics are likely to continue to play a role in driving sentiment in 2017. However, fundamentals point to healthy developed economies with room for further growth. On the back of such a strong 2016, with record highs reached across many equity markets, we remain cautiously optimistic. We continue to recommend holding a diversified investment portfolio to benefit from potential future growth.

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.