Quarterly Investment Comment

Quarterly Investment Comment: Q3 July 2015

Once again, Greece is the financial news story making headlines. After a deal initially looked possible, in the final days talks broke down after the Greek government said it would put the proposals to a referendum. Markets were at first worried by the failure to reach a deal, but since the deadline for Greece’s payment to the International Monetary Fund expired on the night of Tuesday 30 June, international markets have recovered. Compared to the close on Tuesday, the Top UK 100 Companies is up 0.8%, the S&P 500 is up 0.9% and the DAX 30 is up 1.1% by the end of the week. Similarly, after the surprise ‘No’ vote in the referendum itself, the Top UK 100 Companies and the DAX 30 opened down but were soon climbing towards their closing levels on Friday. This would seem to indicate optimism that the wider global economy can deal with the consequences of Greece leaving the euro.

In the UK, the new government is preparing for its first budget on 8 July. Ahead of that event, economic data is looking strong. In June, GfK’s UK Consumer Confidence Index climbed to a reading of 7. The measure saw people being more optimistic about their personal situation and prospects for the economy as a whole, and was the highest reading since the early 2000s. This figure suggests that the economic recovery, which has so far been consumer-led, is likely to continue to benefit from strong consumer demand. Inflation also returned to positive territory, being 0.1% in June (core inflation was 0.9%). The Chancellor of the Exchequer highlighted that low but positive inflation is good news for households.

The UK market has also seen substantial mergers and acquisitions activity. In a merger worth over £11bn, financial firms Towers Watson and Willis agreed to combine. Sabadell Group also received approval from the Prudential Regulation Authority and the Financial Conduct Authority to proceed with its bid for TSB Bank (formerly part of Lloyds). Other acquisitions in the UK included Mediclinc buying a 29.9% stake in Spire Healthcare, ITV acquiring Boom Supervisory and Finsbury Food Group buying Just Desserts. Both the economic data and the amount of M&A activity indicates a strong economy in the UK, and the potential for upside in the markets.

The FOMC, which sets interest rates in the US, met in the middle of June. It decided to leave rates unchanged in order to continue to support the economy. The statement released after their meeting did, however, express positivity at the fact that the economy was expanding moderately again and that significant numbers of new jobs were being created; non-farm payrolls on 2 July showed the US had added 223,000 jobs in June with the unemployment rate falling to its lowest level in seven years. Whilst the S&P 500 was down slightly over the course of June, it remained positive on the year to date.

In the Asia-Pacific region, the Shanghai Composite had its biggest three-week fall since 1992, having declined almost 30% since mid-June. The fall led the FT’s ‘Short View’ to draw a comparison with the behaviour of the NASDAQ as the dotcom bubble burst. Chinese authorities claimed the fall was due to market manipulation, announcing they were beginning a probe into recent trading. In Japan, however, the economic data was good, as the widely-watched Tankan Report showed improving conditions for large companies, as well as that large companies are expecting to increase hiring significantly in the next year. This indicates that the wider Asia-Pacific region is performing strongly, despite concerns in China.

Overall, the world’s major economies have performed well this month, with positive data from the UK, US and Japan. While concerns remain around the Eurozone, the wider global growth indicates that a consumer-led recovery continues in much of the world. It remains important to hold a well-diversified portfolio but, in general, this is a good sign for investments.

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.