United Kingdom
The UK top 100 and all UK shares indices returned 1.63% and 1.41% respectively during August. Sterling’s -2.16% depreciation vs the US dollar was one of the drivers for the blue chip index’s performance, as a stronger US dollar positively impacts earnings of the internationally focused companies.
The UK Manufacturing PMI (Purchasing Managers Index) rose to 56.9 in August up from 55.1 in July, beating a forecasted decline to 55. Any figure above 50 is indicative of expansion in the economy. Production rose to a seven month high with domestic and export demand both strong over the period, the latter boosted by sterling weakness as foreign orders from China, USA, Australia and mainland Europe accelerated. Employment growth continued within the sector, hitting a three year high.
UK inflation remained steady at 2.6%, lower than an expected 2.7%. A drop in petrol prices helped to offset higher prices for food, clothes and utilities. The lower than expected CPI figure eased any expectation of an imminent rise in the BOE rate.
The BOE also held the main lending rate at 0.25%, citing concerns over the effects of slow wage growth and inflation on household spending. The Bank’s Governor, Mark Carney, indicated that some tightening of monetary policy would be necessary over the next three years, possibly exceeding market expectations implied by the current yield curve. The BOE lowered its GDP growth forecast for 2017 to 1.7% from 1.9% as the eventuality of the UK leaving the European Union has started to be reflected in weaker business investment and lower wage growth.
Cognisant of the continuing pressures facing the economy, we remain at a neutral weight within our lower risk mandates, moving to an underweight position in higher risk mandates. Within the sectors, we are biased towards defensive holdings which we believe are better positioned in the event of any slowdown.
Europe
During August, we saw investors reducing risk in the build up to Jackson Hole, the summit for the world’s top central bankers, by selling debt in low credit quality European countries. In a speech given by the European Central Bank’s President, Mario Draghi, at the event, he gave no indication of the next policy strategy as positive confidence indicators are yet to translate to higher growth and inflation. He was not alone as the Fed’s Chair, Janet Yellen, focused on the benefits of past actions and not the outlook for monetary policy. Given investor concerns, growth is slowing and this provided disappointment.
Europe’s main concern is the euro which has steadily risen this year, up 13.3% against the US dollar and 7.4% against sterling – an eight year high. As a consequence, European exports are becoming relatively more expensive and could impact manufacturing and the European trade account in the coming months. The UK and Europe have also started Brexit negotiations, with three issues currently up for negotiations: the UK’s financial liabilities to the EU, the UK’s border with the Republic of Ireland and EU citizens’ rights after Brexit. The key area yet to be discussed is trade and this is likely to be delayed as a bargaining chip by the European Union, providing further uncertainty to the true impact of UK exiting the single market.
The Euro Stoxx 50 Index was down 1.1% for the month of August in local currency. For UK investors, sterling weakened against the euro, which meant the Euro Stoxx 50 index in sterling terms was up 0.7%.