Investment Comment November 2017

October was a strong month for equity markets after an uninspiring September. The US performed well as corporate earnings surprised to the upside. The S&P 500 (+2.22%), Dow Jones Industrial Average (+4.34%) and Nasdaq 100 (+4.50%) were amongst the best performing indices globally. The Top UK 100 Companies (+1.63%) and UK All Companies (+1.67%) also returned to positive territory. The Australian ASX 200 (+4.00%) was a notable performer, driven by rallying commodity prices. Amazon (+15.57%) became the third company in history to add more than $60bn in value to its market cap during a single trading session, after exceeding analyst expectations in its Q3 earnings report.

In the UK, inflation – as measured by the Consumer Price Index – rose to 3.0% in September, hitting a 5-year high. The labour market continued recent trends, with unemployment steady at 4.3% – the lowest level since 1975. Inflation outstripped average wage growth, leading to a 0.4% fall in real pay in the three months to the end of August. Rising prices and reduced disposable household income prompted a 0.8% month-on-month fall in UK retail sales, leading overall growth in the third quarter to slow to its lowest annual rate since 2013. Unsecured consumer borrowing continued to rise, with data from trade group UK Finance showing a rise in credit card borrowing of 7.8% year-on-year, the fastest rate since April 2006.

The British economy remains resilient in growth terms, with Q3 GDP growth of 0.4% exceeding consensus expectations. ONS figures show a strong services sector, with Business and Financial Services contributing half of overall growth. The manufacturing sector posted a 1% quarterly rise, with ONS data starting to reflect the strength of previous survey data. The IHS Markit Purchasing Managers’ Index (PMI) for Manufacturing increased to 56.3 in October, indicating a 15^th consecutive month of expansion. Official figures for manufacturing output and export growth have – until this month – been less correlated to PMI data than generally expected. The IHS Markit PMI for the Service Sector rose to 55.6 in October, up from 53.6 in September, contributing to the all-sector PMI for October showing the strongest rate of expansion by the economy since May.

Strong economic data combined with rising inflationary pressure prompted the Bank of England to raise interest rates for the first time in a decade, increasing by 25bps to 0.5%. Mark Carney, BoE Governor, indicated that at least two further rate rises would be necessary over the next two years. Markets reacted to a perceived ‘dovish’ tone to the statement accompanying the rise, with the Top UK 100 Companies rising by 0.9% and yields on 10-year government bonds falling.

In British industry, senior executives in the car industry have warned Theresa May that they need ‘urgent clarity’ on the trading relationship with the EU in order to make new investments in the country’s automotive sector. Figures compiled by the Society of Motor Manufacturers and Traders suggest that investment in the sector in the first six months of the year predict a 75% drop compared to investment two years ago. 2016 saw a 30% drop in investment as carmakers and suppliers delayed non-essential investment following the EU referendum. UK car manufacturers are highly reliant on exports, with 80% of British-made cars sold abroad, and over 50% of components coming from overseas.

Britain’s leading financial technology, ‘fintech’, start-ups enjoyed record-setting fundraisings this month. TransferWise collected $280m from investors to finance expansion of its cross-border payments service, a record round for a UK fintech. UK fintechs raised over $1bn from venture capital investors in the first nine months of the year. The successful fundraising mirrors wider growth in use of the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) by retail investors. HMRC published statistics this month showing that crowdfunding platforms were making the schemes more accessible to those investing smaller amounts.

In Europe, economic strength continues to overcome political uncertainty. Mark Rutte will lead a coalition government in the Netherlands to include four parties, holding a fragile one-seat majority. The government is likely to be aligned with Germany in many aspects of wider eurozone reform, and has already ruled out support for a eurozone budget as supported by France’s Emmanuel Macron. Eurozone industrial production rose by 3.8% year-on-year in August, well ahead of the 2.6% forecast by economists. This news reversed the depreciation of the euro against the US dollar seen in late September and early October, driven by speculation around further US rate rises.

Average consumer prices across the eurozone rose 1.4% in the 12 months to October, below the 1.5% expected. Economic growth came in ahead of expectations in Q3, rising 0.6% quarter-on-quarter. Euro area unemployment dropped to 8.9%, falling to its lowest level since 2009. Spain’s constitutional crisis in Catalonia has prompted Madrid’s finance minister to lower the country’s growth projection by 0.4-0.5% to 2.3% for 2018. The European Central Bank, ‘ECB’ has announced that it will reduce the pace of its bond-buying programme next year, reducing purchases from €60bn per month to €30bn per month for the first nine months of 2018. The main ECB interest rate was held at 0.00%, with deposit facility at -0.4%, with Mario Draghi – ECB governor – striking a dovish tone.

In the US, President Trump released detailed proposals on his tax plan, hoped to become the first significant legislative victory during his presidency. Proposals include a reduction in corporate tax rates from 35% to 20%, a tax cut for individuals (including a reduction in the number of income tax bands from seven to four, and an increase in the level at which the top rate of tax applies), small business reforms and restrictions on the availability of future mortgage interest tax relief. The plan also targets cash held by US businesses offshore, proposing a one-off toll of 12% on money returned onshore over a period of eight years. In monetary policy, President Trump named Jay Powell as his nominee to serve as the next chair of the Federal Reserve. Mr Powell has served as a Fed governor since 2012 and is widely viewed to be a nomination targeting stability rather than radical change at the Fed.

Brent Crude prices hit $60 a barrel in October, for the first time since 2015. Strong demand and continued Opec-led cuts have seen prices trending higher. Energy stocks in the US and the UK have been strong performers as a result.

October saw equity markets return to strength after a brief hiatus in September. Despite this, we feel that equity markets are not excessively valued. The UK market responded relatively positively to a rate rise, which had been largely anticipated. Economic conditions globally continue to be supportive of future asset price growth, and diversified client portfolios continue to perform well.

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.