Investment Comment November 2016

Market moves in October were generally positive. The Nikkei 225 led the way, up 5.93%. The EuroStoxx 50 rose 1.87% and the Top UK 100 Companies was up 1.03%. In contrast, the S&P 500 fell 1.86%.

In the UK, inflation rose to 1% in September from a previous reading of 0.6%, which may be mainly attributed to the small rise in the oil price since this time last year. Whilst inflation is likely to increase further in the near future due to the continuing effects of the oil price and currency weakness, the Bank of England has so far not indicated that it intends to raise interest rates soon (despite some government pressure to do so). The Bank currently anticipates inflation rising to 3% before falling to the target of 2%.

UK consumer spending continued to grow at the healthy rate of 4.4% year-on-year (although this was down compared to the previous month’s reading of 6%) indicating that consumer confidence remains relatively buoyant despite the ongoing political turmoil.

Towards the end of October, it was rumoured that the Governor of the Bank of England, Mark Carney, would announce his resignation in order to pursue a career in Canadian politics. Following the news that Carney is to stay in post the Pound Sterling rose to a two-week high against the US Dollar. This rise is due both to respect for his experience and also the fact that it indicates wholesale removal of anti-Brexit officials is unlikely. 10 year Gilt yields increased over the month from 0.748% to 1.246%.

The wider political uncertainty around Brexit continues. Conflicting messages emerged from the government regarding its vision for Brexit. On the one hand, the government has indicated its commitment to implementing immigration controls, which would necessitate leaving the single market. On the other hand, commitments given to Nissan to convince them to keep car manufacturing in the UK imply staying in the single market.

Considering UK companies, Shell announced an 18% increase in third quarter profits reflecting cost cutting after the £35bn takeover of BG Group in February. Both Shell and BP said they were planning on ‘lower for longer’ on the price of oil and expect to keep a tight rein on spending in 2017. GlaxoSmithKline completed the sale of its shares in Aspen for £475 million. Laird experienced a significant fall in value, as a result of a slowdown in the smartphone market. GKN agreed the sale of its Stromag business to Altra Industrial for a total consideration of €198 million.

Property fund suspensions brought in after the referendum are being lifted, with M&G Property recommencing trading on 4 November. Market indications are that selling pressure has been stemmed and funds have liquidity for the normalised conditions now prevailing. Sale prices achieved have been close to pre-referendum levels and expectations for 2017 are for modest total returns (2-3%) with yields counter-balancing small capital value drift.

In the US, the focus continues to be on the Presidential election which takes place on 8 November (although early voting has already started). For most of October, polls indicated that Clinton would win by a clear margin. However, that is no longer the case, with most polls now within the margin of error. Our articles on US Elections: Implications for the Global Economy discuss potential investment strategies for either result.

Inflation climbed in the US to 1.5% from 1.1%. As with the UK it is likely that this rise is influenced by the oil price. For this reason, the Federal Reserve may continue to argue that the data is temporary and should be looked through, justifying the continuing shallow path of interest rate rises. Unemployment rose slightly to 5% (from 4.9%), as had been expected after some poor non-farm payrolls data. Confidence readings were mixed: consumer confidence fell to 87.2 from 91.2 but business confidence (as measured by the composite PMI) increased to 54.9 from 52.3.

Speculation continued that the European Central Bank will have to end its bond buying programme early due to running out of bonds to buy. Officials at the ECB have looked at amending the terms of the programme to resolve this, but this would increase the chance of a successful legal challenge to ECB bond buying. Inflation increased slightly to 0.5% (from 0.4%), but the increase was much smaller than that seen in the US and UK.

In Japan, slight deflation continued as inflation remained at -0.5% year-on-year, although it increased to 0.2% (from 0%) month-on-month. However, the Bank of Japan is likely to believe that inflation will increase soon as a fall in unemployment (from 3.1% to 3.0%) indicates labour market tightening.

Elsewhere in the Asia-Pacific region, China held its 6^th Plenum. This is a generally opaque event and there were no major economic pronouncements. Some analysts have interpreted the silence as an indication that the Chinese government will continue with its managed devaluation of the yuan against the dollar. Economic data released at the end of October indicated a slight rise in growth expectations, with PMI rising to 51.2 from 50.4.

Overall, the global economic situation is slightly more positive since September, although considerable political uncertainty remains (most immediately with the US Presidential election). Given this, it is important to remain invested to benefit from potential growth and use diversification to manage political risk.

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.