In our latest monthly investment update for January 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 December on a record high of 7,697.62, up from 7,326.95 points at the end of November, an increase of 370.67 points or 5.05% during the month.
Progress on Brexit negotiations, with an agreement on the first phase of a deal agreed in early December, was a key driver behind the record high.
The first phase Brexit deal agreement was welcome news, however the uncertainty that remains regarding the ongoing negotiations will damage the UK’s future growth, according to the latest economic forecast released by the International Monetary Fund (IMF) in mid-December. The IMF reduced its forecast for growth in 2017 to 1.6%, down from 1.7% in the previous forecast, with growth in 2018 expected to slow further to 1.5%.
Christine Lagarde, managing director of the IMF, noted that while the government had made “significant progress” in reducing the deficit, relative to growth in the rest of the world, “the UK is losing out as a result of higher inflation, pressure on wages and incomes and delayed investment”.
Figures released in December by the Office for National Statistics (ONS) saw price inflation for November hit 3.1%, the highest level in almost six years. The ONS said that airfares and computer games were the main contributors to the increase.
The increase above 3% means that Mark Carney, the governor of the Bank of England, had to write a letter to the chancellor explaining the deviation from the target inflation rate of 2%.
The increase in inflation will only add to the squeeze on households in the UK with the ONS also reporting that average weekly wages only increased by 2.3% in the third quarter of 2017, up from the same quarter in 2016.
In the Eurozone, the economy continues to strengthen with the European Central Bank (ECB) increasing its economic growth forecast as growth across the Eurozone picks up. The ECB now expects the growth for 2017 will be finalised at 2.4%, up from the 2.2% it previously forecast.
The Bank also raised its GDP growth forecast for 2018 to 2.3% from 1.8%, and for 2019 to 1.9% from 1.7%.
The Bank kept its main interest rate at zero and confirmed its asset purchase programme would drop from €60bn to €30bn a month in January.
The ECB is less confident with regards to inflation in the Eurozone with the expectation that inflation will remain below its target of 2% and Mario Draghi, ECB president, commented that “Domestic price pressures remain muted overall and have yet to show convincing signs of a sustained upward trend.”
The IHS Markit/CIPS UK manufacturing Purchasing Managers’ Index (PMI) may have fallen from its four year high of 58.2 in November to 56.3 in December but still indicates that the UK manufacturing sector remained solid at the end of 2017.
Despite a slowdown during December in rates of expansion in output, new orders and employment from November’s highs, growth in all three areas remained well above long-run trends.
Rob Dobson, Director at HIS Markit, commented that “the sector has therefore broadly maintained its solid boost to broader economic expansion in the fourth quarter. The outlook is also reasonably bright, with over 50% of companies expecting production to be higher one year from now”
Over in the US, the Federal Reserve increased interest rates by 0.25% to a target rate of 1.25% to 1.5%, the third increase of 2017. The interest rate rise had been widely expected but what was not expected was the revision of the annual rates of projected economic growth in the US over the next three years.
The economic growth rate for 2018 was raised from 2.1% to 2.5%. For 2019, the growth rate was increased from 2% to 2.1%, and for 2020, from 1.8% to 2%.
The US Labour Departments reported an unemployment rate of 4.1%, the lowest in 17 years, with the expectation that this will dip below 4% in 2018 and 2019. The continued boost in employment combined with strong economic growth seen in 2017 are key drivers in the Federal Reserve’s revised growth forecasts.
In China, many analysts expected a slowdown in the final months of the year due to Beijing’s efforts to cut excess capacity, curb pollution and reduce corporate and financial-sector debt. However, there has been an unexpected increase in exports and imports in an encouraging sign for the world’s second largest economy with exports up 12.3% year on year, and imports up 17.7% year on year in November. Analysts still expect to see a slowdown due to the countries financial risks and pollution restrictions.
The International Monetary Fund (IMF) has released a report on China that echoed these concerns with a stress test on China’s banks revealing that four out of five were vulnerable.
The IMF stated that “The apparent primary goals of preventing large falls in local jobs and reaching regional growth targets have conflicted with other policy objectives such as financial stability”. The IMF acknowledged that the government had taken steps to tackle the risks but warns that China should adjust its strategy further.
In Japan, Gross Domestic Product (GDP) between July and September has been revised up from 1.4% to 2.5%. This was the seventh consecutive quarter of growth for Japan and Marcel Thieliant, senior Japan economist at Capital Economics, said this put Japan in its longest stretch of uninterrupted growth since at least 1994, when comparable data was made available.
The continued positive growth is partly attributed to the four years of economic stimulus implemented by Japan’s Prime Minister Shinzo Abe which uses a mix of monetary easing, government spending and structural reforms, designed to reignite the once-booming economy and lift consumer prices.
In the UK housing market, average prices across the UK rose by 3.9% in the year to the end of November according to the Halifax, the UK’s largest mortgage lender. Some commentators said that the Halifax figures were out of kilter with other indicators, which suggest prices rises are even more modest. Figures from rival lender, Nationwide, suggest an annual increase of 2.5% over the year.
Halifax warned that growth is likely to ease in the longer term though with Russell Galley, managing director of Halifax Community Bank, commentating that “Further ahead, increasing affordability issues, as price increases continue to outstrip wage growth, are likely to curb housing demand and cause price growth to ease.”
The benchmark 10 year UK Gilt yield ended 2017 at 1.19%, a decrease from 1.31% at the end of November.
£1 currently buys $1.355 or €1.1235. The Forex Gold Index is $1,291/oz and the Silver Index is $16.86/oz. Brent Crude Oil Spot is currently $58.59/barrel.
