Investment Comment June 2016

May was a month of relative calm in much of the world economy. Major western stock markets were flat or up slightly over the month, with the Top UK 100 Companies flat at -0.18%, the S&P 500 rising 1.53% and the EuroStoxx 50 up 1.16%. Japan has seen a more noticeable rise of 3.4%.

In Japan, the economy will benefit from Abe’s decision to delay the implementation of a rise in sales tax, which should support consumer spending. However, it raises longer-term concerns about the country’s ability to balance the books (government debt currently exceeds 200% of GDP) as this is the second time in 2 years that an increase in the sales tax has been delayed. Deflation also persists, with the latest year-on-year inflation rate being -0.3%.

Deflation also persisted in the Eurozone. Composite PMI was largely stable at 52.9 (compared to 53 in April). The European Central Bank (ECB) has reiterated that they see inflation returning this year (to 0.2%) and have edged up their growth forecasts to 1.6%, in line with a continuing positive PMI reading. However, the ECB acknowledged that the economy remains weak and so kept interest rates at their record lows. Mario Draghi, President of the ECB, also warned that the possibility of the UK voting to leave the EU is a downside risk for the EU economy.

Currently, however, the UK looks unlikely to leave the EU. Although there have been outlying polls in both directions, there seems to be a general consensus that the UK will vote to remain in the EU. The bookies are clearer in their call: betting odds indicate a 75% chance of remaining in the EU. For more detailed analysis of the EU Referendum, see our notes Thoughts on Brexit and What would happen after Brexit? A historical assessment.

The consumer sector continues to do well in the UK, despite referendum uncertainty. National Express (buses and trains) reported revenues up 11%, and Lookers (car sales) reported profit before tax up 6%. The most recent figures show Retail Sales up 4.3% year-on-year (compared to a previous increase of 3%). Within the oil and gas sector, there were ongoing concerns as Royal Dutch Shell cut more jobs. However, the price of Brent crude oil rose 4.6% in May to near $50 per barrel. The rising oil price since January has helped commodities be the best performing asset class so far in 2016. ARM Holdings continued to modernise its widely used chip technology, releasing a new Mali chip. It also acquired Apical, which owns computer vision technology expected to tie in successfully with the Mali chip.

The UK is not the only country facing political uncertainty. In the US, the Presidential election campaign continues. It is now all but certain that the nominees will be Donald Trump (Republican) and Hilary Clinton (Democrat). Trump’s indication that he would move towards protectionism has caused concerns among US and global companies. However, further clarity is needed before making an assessment of the possible economic effects of the election. Central bank watchers had been anticipating an interest rate rise by the Federal Reserve (Fed) in the near future. However, the very low most recent jobs figures (38,000 new jobs compared to 162,000 expected) may have delayed this rate rise.

In conclusion, there is likely to be significant political uncertainty round the world over the coming months. However, it is clear that there are many potential investment opportunities if you look in the right place. By achieving global diversity within a portfolio, downsides of political risk can be minimised whilst still remaining invested in order to benefit from good company performance.

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.