Investment Comment December 2016

Market moves in November were mixed. In Europe, markets fell with the Top UK 100 Companies down 2.45% and the EuroStoxx 50 down 0.12%. However, other developed markets performed strongly: the S&P 500 rose 3.42% in a month of volatile trading and the Nikkei 225 rose steadily through the month, finishing up 5.07%. The month was characterised by political events across the globe, most notably the election of Donald Trump as US President as well as the Autumn Statement in the UK and the constitutional referendum in Italy at the start of December.

In a result which went against the pollsters’ predictions, Donald Trump won the US Presidential Election on 8 November. The immediate reaction from global markets was negative but this soon reversed. The S&P 500 continued to climb after recovering its initial losses, going on to make a new all-time high later in November. Nonfarm payrolls (the most watched US employment figure, which shows the number of new jobs created) recovered slightly to 178,000 compared to the very poor previous reading of 142,000; however, it was still below the figure of 200,000 which is widely understood to be the level needed to maintain a stable employment rate.

Speculation continued as to when the Federal Reserve would raise interest rates. In mid-November, Janet Yellen, chairman of the Fed, said that rates could rise ‘relatively soon’, which was widely seen as an indication of imminent action. However, weak nonfarm payrolls numbers for the last two months may cause the Fed to wait. They may also be inclined to wait because the strengthening of the US Dollar in anticipation of a hike will have confirmed worries that an interest rate rise would cause the currency to strengthen, potentially harming exporters. The final Fed meeting of the year is on 14 December.

In the UK, Philip Hammond presented the Autumn Statement on 23 November. The event was more a political than fiscal event, with much argument afterwards about the validity of the OBR forecasts. The Chancellor announced that growth for 2016 was now predicted by these forecasts to be higher at 2.1% (up from 2.0%) but the growth in 2017 would be lower at 1.4% (down from 2.2%). The most significant economic policy for the investment community was the commitment to increase infrastructure spending by over £3bn. Consumer spending will be supported by the decision not to raise fuel duty and to reduce the income tax burden by increasing the personal allowance and basic rate band. However, it may be curtailed slightly by increased costs to rail commuters which were announced the week after the statement: fares will rise by an average 2.3%, significantly more than inflation.

UK inflation in October (announced in November) was 0.9% year-on-year (down from 1% in September). However, inflation expectations were much higher at 2.7% in 1 to 2 years’ time. This is broadly in line with Bank of England forecasts that inflation will be 2.7% in 2017. The Office of National Statistics also announced that, from March 2017, it will change the official measure of inflation from CPI to CPIH in order to take account of housing costs for home owners. In a time of rising inflation we expect infrastructure, already supported by government spending, to do well; shares in companies which can increase prices will also outperform.

UK retail sales grew very strongly at 7.4% year-on-year (up from 4.2% the previous month). This shows strong consumer spending, which is expected to support the economy as a whole. The composite PMI reading was also strong at 54.8, well above the level of 50 which indicates economic expansion.

Considering the UK housing market, Halifax said house prices had risen 5.2% year-on-year. However, Nationwide said prices rose only 4.6%. Further, forecasts from property agency Knight Frank indicated prices would grow only 1% in 2017 and may even fall in London. Whilst this may be good news for prospective first-time buyers, it would be a knock to the confidence of the majority of UK consumers who are home owners.

Considering UK companies, BT is setting up Openreach as a separate business entity. They have been instructed by the regulator to ensure there are independent directors on the board. Many UK listed companies benefited in their results from the fall in the pound, which led to high revenue and profit growth in sterling terms for those companies deriving much of their revenue from outside the UK. Commodities companies, particularly Glencore and Anglo American, benefited from the significant rise in the coal price since April.

In Europe, Italy held a referendum on constitutional reforms at the start of December. Before the vote, it was widely argued that a ‘Yes’ vote was crucial in order to stabilise Italy, which has a fragile banking system, and prevent negative economic consequences. However, after a conclusive ‘No’ result, senior figures from both the Italian government and the EU swiftly made statements that there was no threat to the Italian economy or the stability of EU as a whole. In the Austrian presidential election, the far-right candidate was defeated in a result widely seen as supportive of the EU.

Partly triggered by this uncertainty, combined with the likelihood that the US will tighten monetary policy long before the Euro area, the Euro fell 3.46% against the US Dollar in November. There was talk that the Euro may reach parity with the US Dollar, but so far it has not got close to that, and the currency has strengthened slightly following initial volatility after the Italian referendum result.

China has announced new controls on foreign direct investment (Chinese individuals or companies buying assets located outside China). Government approval will be required for transactions which exceed $10bn (or $1bn where the acquisition is outside the acquirer’s core business area). This may be, at least partly, driven by a desire to control the fall in the value of the Renminbi. The Chinese government states that it will block only those transactions which have the principal aim of moving money offshore and that legitimate business transactions will continue.

In India, economic growth was hit in the third quarter by Prime Minister Modi’s withdrawal of the Rs500 and Rs1,000 notes. This has caused a liquidity squeeze as India remains a substantially cash economy and the Reserve Bank of India has not yet been able to replace all the withdrawn cash. Growth came in at 7.3% annualised in Q3 and Fitch downgraded predictions for India’s economic growth to 6.9%.

In conclusion, politics continues to drive the global economic landscape as we approach the end of 2016, and with elections across major European countries in 2017 that looks likely to continue. Many stock markets are, though, continuing to rise. We recommend continuing to hold 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.