Investment Comment June 2015

In Europe, the primary focus continues to be the Greek debt talks. By spending money from the public sector pension fund and local government funds, the Greek government has so far managed to avoid default. However, its reserves are rapidly diminishing. At this stage, though, talks continue, with the European institutions (formerly known as the Troika) indicating they think a solution is possible. Elsewhere in Europe, Podemos (the left wing party) performed very strongly in the local government elections in Spain. Many commentators have indicated that if they have a strong performance in the national elections at the end of this year a Greece-style standoff with the European institutions could result (as Podemos is strongly opposed to austerity). This uncertainty may explain why the euro has weakened in the month to 1 June (with GBP-EUR going from 1.3541 to 1.3952 and EUR-USD going from 1.1215 to 1.0958).

However, in France, a core Eurozone country, the most recent composite Purchasing Managers’ Index indicated that the economy is improving, rising from 50.6 in April to 51.0 in May. The PMI figure in Germany also remained above 50, indicating the economy is likely to expand. Companies can expect to be doing a greater volume of business in the coming months, and so revenues and profits should grow.

CPI showed that the UK officially entered ‘deflationary territory’, with the figure for the year to April 2015 at -0.1%. However, members of the Monetary Policy Committee of the Bank of England said that they were unconcerned, attributing it to transitory effects and saying inflation will approach 1% around the end of the year. Market expectations for the first interest rate rise were pushed further out to the second quarter of 2016.

The UK Government confirmed, following the election, that a planned retail sale of Lloyds Bank shares will go ahead. They also extended an ongoing sale of shares to institutional investors from the end of June to the end of the year; currently, shares are selling well above the Treasury’s breakeven price. International Airlines Group, the parent company of British Airways, made a ‘final offer’ in its bid to take over Aer Lingus (the Irish airline), and the Irish Government voted to allow the deal to proceed. IAG must now convince Aer Lingus shareholders to accept their offer, as well as gain approval of US and European competition authorities. Rio Tinto obtained permission to develop a Mongolian mine worth over $6bn, following two years of talks.

In the US, members of the rate-setting FOMC indicated that they currently believe now would not be an appropriate time to raise interest rates, citing a variety of reasons. Some explained they thought the economy was still too weak to withstand a rate hike; others highlighted continuing low inflation. However, consumers seemed less concerned about the state of the economy, with US Consumer Confidence up slightly from April.

Japanese unemployment fell to 3.3%. However, employees were unable to extract significant pay rises from major employers, leading to concerns among those who believe such pay rises are essential in order to achieve the increase in inflation Japan is seeking. Officials at the Bank of Japan provided some details on their plans for managing the exit from QE, explaining that they have stockpiled capital in order to manage the transition.

Overall, we believe that consumers, particularly in the US and UK, will continue to benefit from low inflation and that their improved spending power will assist company performance and continue to drive 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.