Monthly Investment Update – July 2015
European stock markets fell in value towards the end of the month as the hopes of a last-minute deal to prevent Greece from defaulting on its payment to the International Monetary Fund (IMF) failed to materialise.
With no deal on debt possible before a bailout referendum on 5th July, Greece has become the first developed nation to default on a loan from the IMF. The debt crisis in Greece is dominating investor sentiment, with banks and the stock market in the country closed for the week and capital controls now in place.
Investors fear contagion in the event of Greece leaving the Eurozone; some of the peripheral European countries look especially vulnerable to the consequences of a ‘Grexit’ or Greek-exit from the single currency.
Closer to home, there was some positive news for investors as the British economy grew by more than originally forecast in the first quarter. The Office for National Statistics revised up their previous estimate from the first quarter, from 0.3% to 0.4%. Economic growth was boosted by a better than previously estimated performance from the construction sector.
It means that, on an annual basis, the British economy grew by 2.9% in the year from the first quarter of 2014. This was up from a previous estimate of 2.4%, a strong upwards revision and welcome news for George Osborne ahead of his emergency Budget on 8th July.
Expectations for inflation rose in June, according to the monthly Citi/YouGov poll. Year-ahead inflation expectations rose to 1.4% in June. This represents the highest reading since March and is up from 1% in May. Looking ahead over the next 10 years, the British public expect price inflation to by an average of 2.7% a year.
Commenting on the latest inflation expectations, Citi economist Michael Saunders said “We do expect the Bank of England will start to hike rates in the next few quarters, but at this stage trends in inflation expectations are not really crucial either way in the rate debate,”
The Bank Rate remains on hold at 0.5% with no increase to the scale of the asset purchase programme of quantitative easing at the last meeting of the Bank of England Monetary Policy Committee.
Given the precarious nature of the Greek debt crisis and fears of economic contagion across Europe, we do not expect to see any early or significant move to increase interest rates or reduce the size of quantitative easing.
Emerging market stocks remain vulnerable to the threat of a rate hike by the US Federal Reserve. Whilst the Chinese economy is slowing and tighter monetary policy would have an impact on emerging market asset prices, there is still a long-term opportunity for investors prepared to be selective about emerging market countries, sectors and companies.
House prices across England and Wales were unchanged in May, according to the latest Land Registry figures. The annual rate of house price growth fell to its lowest level since January 2014 and the average price of a home is now £179,696. This remains below the pre-global financial crisis peak of £180,990 which was achieved in November 2007.
Between December and March, an average of 61,789 sales were registered each month, according to the Land Registry figures. This is compared with 69,282 a year previously.
The data also revealed big regional differences in house prices. In Wales, prices were down by 0.6% on an annual basis, at an average of £116,377. In the English regions, average house prices were up by 1% to 9.1%. London and the South East continued to record the highest house price growth.
The benchmark 10 year UK Gilt yield currently stands at 2.08%, rising from 1.82% at the end of May as sovereign gilt yields continue their rise. £1 buys $1.56590 or €1.41020. The Forex Gold Index is $1,171.00/oz and the Silver Index is $15.70/oz. Brent Crude Oil Futures are currently trading at $62.82 a barrel.