Investment Comment September 2016

Most of the developed economy stock markets produced a positive return in August with the Top UK 100 Companies up 0.85%, the EuroStoxx 50 up 1.08% and the Nikkei 225 up 1.92%.  The S&P 500 was almost flat at -0.12%.

Nationwide’s house price data show that house prices rose 5.6% year-on-year, although Halifax data indicate a fall of 1% in July.  Retail sales were up 5.9% in July (compared to 4.3% in the previous month), indicating strengthening consumer confidence. The most recent PMI figures point to improving confidence in the business community: Manufacturing PMI was at 53.3 (compared to 48.3 previously) and Services PMI was at 52.9 (compared to 47.4 previously). UK GDP growth was confirmed at 0.6% quarter-on-quarter for Q2. Inflation also crept up by 0.1% to 0.6%.

Focusing on individual UK companies, Hill and Smith released very good results with underlying profit up 25% and earnings per share up 27%. Smith & Nephew sold its gynaecology business to Medtronic for $350m and committed to return $300m to shareholders via a share buyback. Looking at consumer companies, Unilever announced that it was buying Blueair, an air purification business, and National Express benefited from the Southern Rail chaos, seeing passenger numbers increase by 80% on some routes. ARM shareholders voted to accept the takeover by Softbank at a substantial premium to the price before the bid.

The US non-farm payrolls number for August was below expectations at 151,000 new jobs. The unemployment rate rose to 4.9% and average earnings growth declined to 0.1%. This reduces the chance of an interest rate hike when the FOMC next meets later in September. However, the low numbers may be due to the difficulty of seasonally adjusting US employment data around school holidays. Inflation was down slightly to 0.8% compared to 1% previously.

In the Far East, Japan’s Prime Minister Abe continues to support stimulus. Early in August, Abe’s cabinet approved a stimulus package of ¥7.5tn ($73bn), bringing the total size of recent spending programmes to ¥28tn. The head of the Bank of Japan, Kuroda, also voiced his support for monetary stimulus by saying that deeper negative rates and/or accelerating asset purchases may be necessary to bring Japan back to 2% inflation (inflation was most recently measured as being -0.4%). However, Kuroda did acknowledge the significant potential downsides of negative interest rates, pointing in particular to the effect on financial companies and the requirement on companies to put away larger sums of money to meet pension obligations.

GDP figures indicate that China continues to grow strongly at 6.7% year-on-year for H1 2016.  Services PMI was also up, rising from 51.7 to 52.1, indicating that the Chinese economy continues to grow strongly. With the G20 conference for 2016 being held in China, President Xi Jinping took the opportunity to commit China to a sustainable economy and increasing involvement in global trade.

In the Eurozone, the leaders of Germany, France and Italy met to discuss economic policy for the bloc. Whilst talks were amicable, there was no conclusive agreement over whether states should be allowed to make use of greater fiscal stimulus. Unemployment remains high at 10.1% and inflation remains very low (0.2%).

In conclusion, the global economy picked up in August. However, performance varies between regions. Therefore it remains important to diversify globally in order to capture the best performance and minimise downside 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.