Investment Comment May 2016

European stock indices were up in April: the Top UK 100 Companies was up 1.6%, and the EuroStoxx 50 was up 2.5%. The Nikkei 225 was also up (by 3.1%) but the S&P 500 was down slightly (by -0.4%). Globally markets were relatively calm.

Within the UK, Manufacturing PMI dropped to 49.2, signalling a contraction. This was in contrast to analyst expectations of accelerating growth. However, this should not be overly concerning. Manufacturing makes up a relatively small portion of the UK economy. Services are a much bigger component. The last Services PMI reading (which related to data gathered in March) showed the services sector still growing strongly with a reading of 53.7.

UK house prices continued to grow, with the latest Halifax House Price Index showing prices had risen 2.6% over the last 3 months. This is comparable to increases in the preceding two months. However, it does not include the possible effects of the new second home surcharge through Stamp Duty (introduced in April). Housing affordability continues to be stretched with the average house costing 5.1 times average earnings (9.2 times in London).

Rolls Royce have signed a £4bn deal with Garuda Indonesia (the national carrier of Indonesia) to upgrade 14 of their A330s. Sky have observed an increasing turnover of television customers: there is speculation that this is due to the loss of key sporting coverage. Clarkson, the shipping company, saw profits rise substantially. As well as indicating that the company can handle lower global trade well, it may be related to a recovery in the amount of trade, as measured by the Baltic Dry Index. Royal Dutch Shell is under investigation in Italy for an allegedly corrupt oil deal. Italian authorities have suggested that Shell’s $1bn acquisition of an oil block was questionable.

In China, there are indicators that the economy is turning around following the volatility of the last year. New orders (an underlying industrial measure which is a good indicator of genuine economic activity) returned to growth with a reading of 51.4. This is a positive sign for the world economy given that China imports large amounts of raw materials to feed its manufacturing industry. Elsewhere in the Asia Pacific region, the Bank of Japan surprised investors by not increasing its monetary stimulus, causing the Nikkei 225 to fall in early May.

Eurozone unemployment ticked down again to 10.2%. This remains a relatively high level of unemployment compared to the expected natural level of unemployment, indicating that the Eurozone has been much slower than other developed markets to emerge from the crisis, and is therefore earlier in the economic cycle. However, the falls in unemployment do indicate that the Eurozone is recovering. This is supported by the latest Composite PMI which shows a growth reading of 53.

In the US, unemployment remained in line with FOMC targets at 5%. At 0.9% inflation was lower than targeted and lower than the previous reading of 1%. This supports market predictions that the FOMC will be more dovish than they are currently indicating, which would be supportive for the US economy. Employment indicators are now suggesting that the economic cycle in the US has reached maturity. As well as unemployment level being in line with expectations of structural unemployment, layoffs have consistently been at pre-crisis levels for some time. Job quits (a good indication of belief in the strength of the economy) are trending upwards and have also reached pre-crisis levels (of over 2m per month).

The global economy remains very varied. Different regions are displaying different characteristics. To ensure clients benefit from all opportunities, we continue to recommend a diversified portfolio across asset classes.

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.