Monthly Investment Update March 2018
In our latest monthly investment update for March 2018, we look at how the investment markets, global economy and commodity prices are performing.
The FTSE 100 index of leading UK company shares finished February at 7,231.91, down from 7,533.55 points at the end of January, a decrease of 301.64 points or 4% during the month. The FTSE suffered a sharp fall at the beginning of February, mimicking falls in US and Asian markets with some analysts claiming the falls were a continued reaction to the very rapid rise in interest rates and inflation expectations over a short period of time.
Markets have recovered somewhat since the falls but the Vix volatility index, known as Wall Street’s fear gauge, has returned to its historical average of circa 20 after a long period of being well below this. This signifies that there is likely to be more market volatility expected in the short to medium term.
The Office for National Statistics (ONS) revised down economic growth in the UK for the final quarter of 2017 from 0.5% to 0.4%. The revision was due to slower growth in production industries, the ONS said.
One particular drag on the UK economy was the shutdown of the Forties Pipeline System for a large part of December. The closure of one of the UK’s most important oil pipelines cost about £20m a day in lost activity, according to Oil and Gas UK.
Chris Williamson, chief economist at IHS Markit, said that some areas of the UK economy looked “worryingly weak” in the final months of last year. The data suggested the construction industry is in recession, business investment was stagnant and household spending was seeing only “modest” growth, he said. Households have been squeezed by rising inflation coinciding with weak wage growth.
UK Consumer Price Index (CPI) inflation remained steady at an annualised rate of 3% in January, slightly higher than the 2.9% that most economists were expecting. The ONS said that although petrol prices had risen by less than this time last year, the cost of entry to attractions such as zoos and gardens fell more slowly.
It said, however, that after rising strongly since the middle of 2016, food price inflation now appeared to be slowing.
The Monetary Policy Committee (MPC) voted unanimously to hold interest rates at 0.5% at their February meeting. However, the Bank of England said that rates may need to rise earlier and by a somewhat greater extent than they had previously thought at their last MPC meeting in November 2017. The value of the pound jumped by about 1% against both the dollar and the euro in reaction to the Bank’s comments.
Economists think the next rate rise could come as soon as May. Paul Hollingsworth, senior UK economist at Capital Economics said: “Today’s releases pave the way for an interest rate hike in May, and we think that the MPC will hike a further two times this year, taking Bank Rate to 1.25%.”
Data from the latest IHS Markit/CIPS UK manufacturing Purchasing Managers’ Index (PMI) shows the rate of expansion remaining largely static, with the rate falling slightly from 55.3 in January to 55.2 in February. However, the PMI remains well above its long run average of 51.7, and manufacturing output continues to rise at a solid pace.
Rob Dobson, Director at IHS Markit, said “The February survey provided mixed signals on the health of the UK manufacturing sector” but he remained optimistic stating that “positive news was provided by other survey indicators that are suggesting output growth may revive in the coming months”.
The European Union economy expanded by 2.5% in 2017, its strongest performance since 2007, when it grew by 2.7%. In the final three months both the EU and the 19-nation Eurozone grew by 0.6% compared with the previous quarter. That was mirrored by growth in the EU’s biggest economy, Germany, which grew by 0.6% in the final quarter of 2017. France also expanded by 0.6%, while Spanish growth was a notch stronger at 0.7%.
Ryan Djajasaputra, economist at Investec, said much of the growth last year had been driven by the Eurozone’s core four economies: Germany, France, Italy and Spain. However, Eastern European economies, including Latvia and Slovakia, were growing “particularly fast”, he added. He attributed the strength of the Eurozone to the European Central Bank’s (ECB) stimulus policies, which have brought down the cost of borrowing in recent years.
Over in the US, the US Federal Reserve is optimistic in regards to the country’s economic growth in 2018 according to the minutes of their January meeting. A number of Federal Reserve members “marked up” forecasts for 2018 growth to reflect stronger economic data since December, according to the minutes. A view that boosts the case for further interest rate rises in the US.
At the January meeting, “almost all” Fed members said they expect inflation to hit the bank’s 2% target over the medium term, bolstering the case for future rate rises. However, not all Federal Reserve members were in agreement with some seeing “little solid evidence” of inflation or wage pressures. They judged the committee could afford to be patient.
Turning to the developing economies, India has overtaken China as the world’s fastest growing economy based on data for the final quarter of 2017. India’s economic growth accelerated to an annualised rate of 7.2% between October and December 2017, 0.5% higher than China’s final quarter growth of 6.7%. India’s growth was driven by higher government spending and a pickup in manufacturing and services growth.
India is expected to further widen the gap over China in 2018, with the International Monetary Fund predicting last month that it will grow by 7.4% this year.
Meanwhile in Japan, the economy has fared well since the introduction of “Abenomics”, a series of reforms brought in by Prime Minister Shinzo Abe starting in 2012 that focused on monetary policy, fiscal stimulus and structural reforms. However, economic growth in Japan slowed in the final quarter of 2017 to an annualised rate of 0.5%, somewhat lower than analysts’ forecasts of 0.9% and down from the previous annualised growth rate of 2.2%.
Despite the slowdown, this was still Japan’s eighth consecutive quarter of growth, the longest growth streak since the 1980s. Tokyo-based economist Jesper Koll of WisdomTree Asset Management remained positive commenting that “You’ve got wages improving, and the quality of jobs is improving, so the overall environment for consumption is now a positive one, while over the last 30 years it was a negative one,
Returning to the UK, average house prices fell by 0.6% in January, following the 0.8% fall in December, according to data released by Halifax, the UK’s largest mortgage lender. On an annual basis Halifax reported that the cost of homes was still rising by an annualised rate of 2.2%, the slowest rate of increase since July 2017.
Russell Galley, managing director of Halifax Community Bank, commentated on the main driver behind the fall saying “Although employment levels grew by 102,000 in the three months to November, household finances are still under pressure as consumer prices continue to grow faster than wages”.
Contrary to this, rival mortgage lender Nationwide reported a pickup in house price growth in January with average house prices increasing by an annualised rate of 3.2%. The building society did note that this was higher than expected with Robert Gardner, the Nationwide’s chief economist, saying “The acceleration in annual house price growth is a little surprising, given signs of softening in the household sector in recent months”. Looking ahead, Nationwide see that modest growth in the UK economy and a squeeze on household budgets would keep a lid on house price rises.
The benchmark 10 year UK Gilt yield ended February at 1.501%, a small increase from 1.50% at the end of January.