Monthly Investment Update: February 2016
The markets have got off to a bad start this year partly due to ‘market malaise’ triggered by China’s economic growth concerns as well as low oil prices caused by oversupply of the commodity, compounded by weak demand.
Manufacturing activity fell in China for a sixth consecutive month, with analysts suggesting the economy has too much capacity combined with too little demand. The official Purchasing Managers’ Index (PMI) in China for January fell to 49.4. This is the lowest score since mid-2012 and came in below economist forecasts of 49.6. An index reading below 50 indicates contraction.
The UK economic growth figures for the three months to January are the lowest they have been since 2013 according to the CBI, at just 0.5% for the quarter.
Reports suggest we may see growth forecasts for 2016, as set by the Bank of England, fall from 2.5% to 2.3% when they release their latest quarterly inflation report.[tweet_box]UK economic growth forecasts could fall this month, pushing interest rate rise further back[/tweet_box]
According to the CBI Growth Indicator, output from professional services firms such as legal services, telecoms and computing had the greatest reduction in growth rates. However, it has been noted that this was widespread as both manufacturing and business services also struggled to make a mark.
The main indicator for European price inflation rose to 0.4% from 0.2%, despite fears that inflation growth could turn negative by the spring.
According to Nordea economist Jan von Gerich, this growth will more than likely be reversed in February and this can be seen to be supported by ECB President Mario Draghi who has suggested that further policy easing could be unveiled in early spring. With an inflation target of 2%, the European economy still has a long way to go to meet their target.
The UK Consumer Prices Index (CPI) measure of price inflation rose from 0.1% to 0.2% for the first time since January 2015. This was driven by transport costs, particularly air fares, and to a lesser extent motor fuels according to the Office for National Statistics (ONS). Air fares experienced an annual increase this year of 26.8% which is the largest annual rise since 2011.
Price inflation a measured by the Retail Prices Index (RPI) was 1.2% in January, up from 1.1% in November. Unlike CPI inflation, RPI includes elements of housing costs, such as mortgage interest payments and council tax.
This persistently weak price inflation means there is little incentive for the Bank of England to raise interest rates. IHS Global Insights predict that the Bank of England won’t consider raising the base rate until August at the earliest.
Average house prices increased by 7.7% in the year to November 2015, with the biggest rises being seen in the east of England. Figures from the Mortgage Advice Bureau showed that buyers now need up to £80,000 as a down payment for properties in the UK.
According to a UK Housing Market report by Capital Economics, “the market seems ripe for a correction” as prices are reaching the limit of affordability for many people.
The benchmark 10 year UK Gilt yield stands at 1.59%, lower than the start of January.
£1 buys $1.43 or €1.32. The Forex Gold Index is $1,121.70 /oz and the Silver Index is $14.31/oz. Brent Crude Oil Futures are currently trading at $35.64 a barrel.