Monthly Investment Update – May 2018
In our latest monthly investment update for May 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 April at 7,509.30 points, up from 7,016.76 points at the end of March. This represents an increase of 492.54 points or 7% during the month.
The monthly increase sees the FTSE 100 regain the majority of the losses that occurred during February and March, although the index is still some 3.5% lower than where it started the year.
A significant part of the increase in April followed the International Monetary Fund (IMF) announcement of an upgraded forecast for UK economic growth for 2018 and that global growth would have its strongest year since 2011.
Figures released from the Office for National Statistics (ONS) showed that Gross Domestic Product (GDP) was up 0.1% in the first quarter of 2018, down from growth of 0.4% in the previous quarter. This was the slowest quarterly growth rate since 2012 and below the 0.3% that most economists had forecasted.
The ONS stated that the poor growth was driven by a sharp fall in construction output and a sluggish manufacturing sector.
The EY Item Club forecasting body believe that the Bank of England is likely to raise interest rates twice in 2018 and twice in 2019, despite a slow-moving economy.
The governor of the Bank of England, Mark Carney, said that a rate rise is likely this this year but any increases will be gradual. He added that some of the major Brexit decisions, including on the detail of the implementation period and the shape of a final deal, would weigh on how fast interest rates rises would happen.
The Consumer Price Index (CPI) fell to 2.5% in March, down from 2.7% in February, with the ONS stating that the biggest downward contribution to inflation came from clothing and footwear. Prices rose by 0.7% between February and March 2018 compared with a 2% increase during the same period last year.
Despite the slowdown in UK economic growth and the fall in the inflation level, many economists still expect the Bank of England to raise interest rates in May.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said: “While an interest rate rise now looks odds on in May, the Bank will still be wary of moving too fast and too soon, so beyond that monetary policy is still likely to move at a slovenly pace.”
Data from the latest IHS Markit/CIPS UK manufacturing Purchasing Managers’ Index (PMI) shows the rate of expansion fell in April, with the rate decreasing from 55.1 in March to 53.9 in April, a 17-month low. Rates of expansion eased for output, new orders and employment, in part reflecting a weakening in the pace of expansion of new work from abroad.
Rob Dobson, Director at IHS Markit, said: “The start of the second quarter saw the UK manufacturing sector lose further steam…Looking ahead, the trend in manufacturing production is likely to remain subdued. Weak demand meant firms are seeing backlogs of work fall and stocks of unsold goods rise, limiting the need for output to rise in May”
The European Union economy expanded by 2.5% in 2017, its strongest performance since 2007, when it grew by 2.7%. However, growth in the first quarter of 2018 is expected to be more subdued as France’s economy slowed more than anticipated. The second largest economy within the Eurozone grew by 0.3% in the three months to March, a significant decrease from the 0.7% expansion in the final quarter of 2017.
The President of the European Central Bank (ECB), Mario Draghi, speaking to reporters after the Governing Councils meeting, said that all Eurozone countries had experienced “some moderation in growth or loss of momentum” in recent weeks. Draghi added that “some normalization was expected” and pointed out that growth levels are still above historical averages. The ECB expects the Eurozone’s growth “to remain broad-based and solid”.
Over in the US, the Commerce Department published figures detailing that US economic growth had slowed to an annualised rate of 2.3% in the first quarter of 2018. The figure is better than the 2% economists had predicted, but still down from the rate of 2.9% seen in the fourth quarter of 2017. The main driver behind was a slowdown in consumer spending which grew at its weakest pace in nearly five years.
The slowdown in economic growth is not expected to slow the pace at which Federal Reserve rate setters increase interest rates. Minutes from the Federal Open Market Committee meeting published in April month showed policymakers “expected that the first-quarter softness would be transitory”.
A number of participants also said they expect stronger growth and inflation in the next few years, suggesting the path for interest rates “would likely be slightly steeper than they had previously expected”, according to the minutes.
Meanwhile in China, economic growth for the first quarter was at an annualised rate of 6.8%, beating analysts’ expectations and above the 6.5% annual growth target for 2018. Strong levels of consumer demand helped the world’s second largest economy demonstrate its resilience in the face of concerns about China’s debt levels.
The Chinese government has been taking measures to contain ballooning debt and a housing bubble without denting growth. However, Amy Zhuang, China economist at Nordea Bank in Singapore described the first quarter growth figures as “solid” but also said there are signs that the positive momentum is weakening, likely due to the cooling housing market.
Turning to India, a research report from Deutsche Bank forecasts that the Indian economy is witnessing a cyclical upswing and economic growth in the country is likely to be in the region of 7.5% for 2018-19, higher than the 6.6% growth recorded in 2017-18.
The report, however, noted that higher global oil prices, risk of an earlier than anticipated rate hike cycle from the Reserve Bank of India (RBI) and the potential negative impact of the banking sector frauds on credit and overall growth are some of the factors that pose downside risk to its baseline GDP estimate. Brent crude prices are currently hovering around $75 a barrel, which is up 12% from end December 2017 levels.
According to the Deutsche Bank research report, a $10 increase in oil prices can shave off growth by about 10 bps while other factors pose about 15-20 bps additional downside risks
Returning to the UK, average house prices rose by 0.2% in April, following the 0.2% fall in March, according to data released by Nationwide. The annualised rate of growth picked up slightly to 2.6% in April, from 2.1% in March.
Robert Gardner, Nationwide’s chief economist, said: “Looking ahead, much will depend on how broader economic conditions evolve, especially in the labour market, but also with respect to interest rates”. Overall, Nationwide continue to expect average house prices to rise by 1% in 2018.
The benchmark 10 year UK Gilt yield ended April at 1.41%, a small rise from 1.35% at the end of March.
£1 currently buys $1.3741 or €1.1403. The Forex Gold Index is $1,313.20/oz and the Silver Index is $16.19/oz. Brent Crude Oil Spot is currently $74.26/barrel.