In our latest monthly investment update April 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 March at 7,016.76, down from 7,231.91 points at the end of February, a decrease of 215.15 points or 2.98% during the month.
The FTSE continued its decline in March on the back of continued uncertainty around Brexit, a strengthening British pound and talks of import tariffs from President Trump sparking fears of a trade war with China.
The British Chambers of Commerce (BCC) raised its UK economic growth forecast for 2018 from 1.1% to 1.4%, and for 2019 from 1.3% to 1.5%.
The increase is driven by slightly stronger than expected consumer spending and the expectation that UK exports will remain robust on the back of strong global growth. However, the BCC warned that these growth levels are still well below the UK’s long term average and likely to be the lowest among the G7 economies.
The Monetary Policy Committee (MPC) voted to keep interest rates on hold at 0.5% during their March meeting. However, two out of the nine members of the MPC voted in favour of an increase in the Bank of England base rate to 0.75%. This was a change from the unanimous vote in the previous meeting to keep rates on hold.
The meeting notes also revealed that the MPC believes “ongoing tightening” was likely to return inflation back to the Banks 2% target level. Economists have interpreted these points as indication that the MPC is likely to raise interest rates in May 2018.
Data published by The Office for National Statistic (ONS) in March showed that Consumer Price Inflation (CPI) fell to 2.7% in February 2018, down from 3% in January. Falls in petrol prices and food were the main contributors to the overall decrease.
The decrease in inflation eases the pressure on the Bank of England to raise interest rates. However, the Bank commented in late 2017 that they expected inflation to reduce after it reached 3%, indicating that the Bank may have already taken the fall in inflation into account.
Data from the latest IHS Markit/CIPS UK manufacturing Purchasing Managers’ Index (PMI) shows the rate of expansion remaining largely static, with the rate increasing slightly from 55 in February to 55.1 in March. Growth in output picked up but this was partially offset by slower increases in both employment and new orders.
Rob Dobson, Director at IHS Markit, said:
The latest PMI survey provided further evidence that UK manufacturing has entered a softer growth phase so far this year. The key question is whether growth can now be sustained, albeit at a lower level, into the coming months. On that front the news is generally positive.
The European Union economy expanded by 2.5% in 2017, its strongest performance since 2007, when it grew by 2.7%. The European Commission has stated that one of the most significant risks to maintaining this level of growth in 2018 is the Italian economy because of its large debt and weak banking sector.
It also noted that Cyprus and Croatia were the other European Union members that were facing excessive economic imbalances. Italy’s issues may become more serious as it embarks on likely lengthy negotiations to form a new government after recent elections delivered a hung parliament and boosted anti-austerity forces.
Over in the US, the Federal Reserve has increased its benchmark interest rate to a target range of 1.5% to 1.75% citing a strengthened economic outlook.
Members of the Federal Open Markets Committee, which votes on rates, predicted the US economy will grow by 2.7% in 2018, faster than the 2.5% predicted in December 2017. The Federal Reserve also signalled that they would increase rates twice more in 2018, while raising the forecast for rate hikes in 2019.
Turning to the developing economies, China has set its 2018 economic growth target at circa 6.5% for 2018.
The report also stated that China would clamp down on the kind of financially risky operations which have threatened to cause the collapse of major firms. This follows recent steps by China to take control of insurance giant Anbang and several other high-profile companies are also having their finances put under scrutiny.
China is now the world’s second largest economy, but a reliance on borrowing has led to pressing political concerns about debt risk. As expected, Premier Li Keqiang said reining in this risk would be a key policy for 2018, promising to “see that internal risk controls are tightened in financial institutions” and a “serious crackdown on activities that violate the law like illegal fundraising and financial fraud”.
Meanwhile in Japan, manufacturing activity expanded at a slightly slower pace in March, revised data from the Markit Nikkei Japan Manufacturing Purchasing Managers Index survey showed, as growth in new orders and output moderated slightly though the economy overall remained in solid shape.
Joe Hayes, economist at IHS Markit, said that “The reading of 53.1 still indicates a fairly solid pace of improvement in business conditions.”
Some economists have cautioned that the pace of growth in the Japanese economy could slow this year because consumer spending may subside slightly, even though strong exports performance of Japan Inc. continues to underpin the world’s third-biggest economy.
Returning to the UK, average house prices fell by 0.2% in March, following the 0.4% fall in February, according to data released by Nationwide, with London again the weakest region. The annualised rate of growth slowed from 2.2% in February to 2.1% in March, making it the lowest growth rate since June 2013.
There were stark differences in growth across regions of the UK with London deceasing at an annual rate of 1% while the West Midlands and Northern Ireland grew at an annual rate of 4.9% and 7.9%, respectively. As a result, the north-south divide has narrowed slightly, although values in the north of England are on average still less than half of those in the south. A typical house in the north costs £163,138, compared with £331,047 in the south.
Robert Gardner, the Nationwide chief economist, pointed to the continued squeeze on incomes, despite a modest pickup in wage growth. He commented that “consumer confidence has remained subdued, due to the ongoing squeeze on household finances as wage growth continues to lag behind increases in the cost of living”.
The benchmark 10 year UK Gilt yield ended March at 1.35%, a decrease from 1.501% at the end of February.
£1 currently buys $1.4079 or €1.14260. The Forex Gold Index is $1,323.85/oz and the Silver Index is $16.28/oz. Brent Crude Oil Spot is currently $63.83/barrel.
