Investment Comment July 2016

The UK’s vote to leave the EU was the dominating economic event of June. We have addressed the consequences of the vote in our note Investment Consequences of Brexit, which is available on our website. In the short term, the markets are now looking more healthy than immediately following the vote. On the afternoon of polling day the Top UK 100 Companies closed at 6338.10 and it closed the month 2.6% higher than it was immediately before the result at 6504.30. The Pound Sterling has declined significantly from (against the US Dollar) approximately 1.48 to about 1.29. However, the International Monetary Fund calculates that it remains overvalued by at least 3%.

UK retail sales figures for May (the most recent available) show a year-on-year increase of 5.2% (compared to the previous month’s 6%). We will not receive figures for the period after the referendum result for some time, but these figures certainly indicate that soon before the referendum consumers were increasing their spending considerably ahead of increases in income (most recent wage growth figures show wages growing at 2.3%). Despite many of the effects of the oil price crash now having been rebased out of the inflation figures, inflation in the UK remained low, with CPI at 0.3%. House price growth slowed, particularly in London, with Rightmove’s index showing national growth at 0.8% and 0.2% in London.

Greene King, the chain of pubs, reported strong growth with revenue up 57.6%. Concerns over BT’s pension scheme deficit grew as the deficit increased from £7bn to £9.9bn. Shire completed the takeover of Baxalta for $32bn and now expects significant revenue growth as a result.

The US employment numbers (non-farm payrolls) released last month were much lower than expected. This is now widely expected to have been a blip that will normalise in the following releases. However, it looks to have had an effect on FOMC (Federal Open Markets Committee – the US interest rate setting body) policy: the FOMC had been expected to raise interest rates in June, but ultimately it did not do so. It is now expected, following comments by Janet Yellen (head of the Federal Reserve) and in the latest FOMC minutes, to further delay raising rates as it waits for the uncertainty surrounding Brexit to reduce. US inflation also decreased slightly to 1% year-on-year (compared to 1.1% previously).

In the Eurozone, inflation figures turned positive, albeit only slightly, with a reading of 0.1% (compared to -0.1% previously). This suggests that the extreme monetary loosening pursued by the European Central Bank may be experiencing some success. However, the economy continues to lag behind other developed economies, with unemployment running at 10.1% (although slightly lower than the previous reading of 10.2%). However, consumer spending (a good indication of consumer confidence) is picking up, with year-on-year retail sales increasing 1.6% (compared to a previous reading of 1.4%).

Deflation continued in the Japanese economy, being -0.4% in the latest reading (compared to -0.3% previously). This is part of an ongoing trend which suggests that so-called Abenomics (Prime Minister Abe’s three-pronged plan to reboot the Japanese economy) is not being successful. This may result in further monetary stimulus following the upcoming Japanese elections. In China, manufacturing PMI fell to 48.6 (from 49.2), indicating a continuing slowdown in the manufacturing sector.

Undoubtedly, this is a time of great uncertainty in the UK economy. Despite this, investments have continued to perform well, as can be seen in the table. It is important to keep a diversified portfolio to protect from uncertainty, but it remains equally important to ensure the portfolio remains invested in order to give the best opportunity to preserve and grow wealth in real terms.

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.