Investment Comment August 2016

Developed economy stock markets have performed well in July. The Top UK 100 Companies continued its recovery following the result of the EU referendum, rising 3.38% over the month. Other developed markets rose by even more, with the S&P500 up 3.56%, the EuroStoxx 50 up 4.10% and the Nikkei 225 up 6.38%.

In the UK, the political and economic situation has continued to develop. A new government is now in place, led by Theresa May. Chancellor Merkel, who will be a strong influence in the upcoming negotiations between the UK and the EU, has indicated that she agrees the UK will need time to establish its negotiating position. UK stock markets received both these facts well, as they suggest that the UK will be able to start negotiations sooner and that they will be amicable when they do start.

Looking at the economic situation, the picture is more mixed. As previously mentioned, the Top UK 100 Companies is significantly up on the month, and up even more since the referendum result; the Top UK 250 Companies is almost back to its pre-referendum level (closing July at 17,282.88 compared to a closing price on 23 June of 17,333.51). The GBP-USD exchange rate continues to be volatile, but has begun to stabilise around 1.32 having fallen about 11% from the high before the result. This has the potential to help UK manufacturers by making their prices more attractive compared to overseas competitors. The benefits are enhanced for those companies which have non-sterling denominated earnings, as those earnings will increase in value in sterling terms.

Confidence within the UK is still suffering, however. The UK falling from 5th richest nation to 6th richest nation received considerable press attention (it has since returned to being 5th richest). Such stories generally affect consumer confidence, which fell in July to its lowest level in 26 years. Industrial confidence also fell, dropping to 48.2 in July (compared to 52.4 in June), which indicates a contraction. Prolonged lack of confidence could have a negative effect on consumer and corporate spending which would have a knock-on effect on the country’s economy.

ARM Holdings is being taken over by SoftBank for about £24bn; the government has indicated that they will not block the takeover. BT Group benefited as it was announced it would not be forced to sell Openreach (although its management will have to be separated out). However, BT was hit by an update to its pension liabilities, which indicated that the deficit had grown to £12bn, compared to a company market cap of about £40bn.   Unilever acquired the Dollar Shave Club for $1bn, as part of a growth expansion strategy.

In the US, the economic data is more clearly positive. US GDP was up 1.2% (annualised) in the second quarter (compared to 0.8% in Q1). Within this, household consumption was up 4.2%, indicating healthy levels of consumer spending. Business confidence is also increasing, with composite PMI rising to 51.5. However, despite this positive data, certain members of the Federal Reserve continue to argue against an immediate rate rise; the market is currently pricing in only a 30% chance of a rate hike by December.

Shinzo Abe, Prime Minister of Japan, announced a new stimulus package for Japan worth $265bn. Despite previous attempts to stimulate the economy, inflation and growth in Japan remain low. The announcement caused a significant jump in the Nikkei 225. It is expected that at least half of the money will be spent on government infrastructure programmes, in line with Cantab Asset Management’s view that infrastructure will benefit from government stimulus.

In conclusion, markets in all developed economies have advanced albeit that in the UK, the confidence underlying the economy may be weakening. In the US and Japan, in contrast, confidence is higher and the economy is being supported actively by the central bank and government respectively. Our view is that the global economy remains robust and that diversified portfolios should benefit.

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.