United Kingdom
The UK top 100 and all UK shares indices dropped 2.44% and 2.47% respectively over the period. Political uncertainty reigned as Theresa May eroded a seemingly unassailable majority leading to having to form a coalition government with the Democratic Unionist Party. As the Brexit negotiations begin, concessions are already being made and it seems as though the ‘Hard Brexit’ that was expected is looking less likely following increased pressure from the private sector. In addition, conflicting statements from Mark Carney regarding the tightening of monetary policy prior to negotiations ending contributed volatility to the markets.
Buoyed by the increasing prospect of a rate hike, Sterling appreciated 1.05% against the US dollar over the month. The Purchasing Manufacturers Index (PMI) fell to a three month low of 54.3, still in expansionary territory, but down from the May 56.7 figure and lower than the estimated figure of 56.3.
The UK savings ratio hit an all-time low of 1.7% in the first three months of the year, down from 3.3% in the previous quarter. With a fall in real incomes for the ninth consecutive month and rising consumer prices combining, the dip in the savings ratio is perhaps indicative of people continuing to fund lifestyles through savings.
The Bank of England voted, albeit 5-3, to hold the main lending rate at 0.25%. Cognisant of the pressures facing the United Kingdom, we will be reducing our exposure and repositioning the allocation to Japan where we believe there to be attractive valuations at this time.
Europe
There is a feel good factor in Europe at present with GDP for the first quarter revised up to 1.9% year on year from 1.7%. This coincided with strong consumer confidence and PMI manufacturing numbers above expectation. Despite this, old problems are hard to shake off. CPI in May and June disappointed across the board, but particularly in France – June year on year CPI was 1.3% peaking in March 2017 at 2.0%. This is at odds with comments from the ECB which has outlined plans to deal with excess inflation by reducing the central bank’s bond holdings from QE. There is also slow progress in improving European unemployment which remained at 9.3% for the last two months to May. The Italian government had to intervene to wind up two Venetian banks in the final weekend of June, at a cost of €5.2bn, that could rise to €17bn, to provide liquidity to Intesa Sanpaolo which will take over the two firms’ solvent assets while the government will ring fence bad debts.
The MSCI Europe Index, excluding the UK, rose 1.9% over the month in local currency. For UK investors, sterling continued to weaken against the euro, which meant the MSCI Europe Index, excluding the UK, in sterling terms, was up 5.45%.
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