In our latest monthly investment update for December 2017, we look at how the investment markets, global economy and commodity prices are performing.
The FTSE 100 index of leading UK company shares finished November at 7,326.95 points, a decrease of 166.13 points or 2.22% during the month.
On the 2nd November the Bank of England increased interest rates from 0.25% to 0.5%, reversing the interest cut made in August 2016. The Monetary Policy Committee (MPC) pointed to record-low unemployment, rising inflation and stronger global economic growth as support for the increase.
The rate rise will mean an increase in mortgage payments for the circa four million households on variable rate deals. The increase is good news for savers as the Bank of England expects banks to pass on the increase, although banks are not obligated to do this and so far the saving rate increases have been limited.
The rate rise marks the first increase in over ten years and Mark Carney said he expected “about two more interest rate increases over the next three years”.
The Office for Budget Responsibility (OBR) has revised down its growth forecast for the UK economy for 2017 from 2% to 1.5%. The OBR forecasts that growth will drop to 1.3% by 2020 before rising to 1.5% in 2021.
As a result of the lower growth by 2021-22 government tax receipts will be £20bn lower that predicted than the forecast the OBR gave in March this year. With lower tax receipts the government will need to borrow more than it had planned making it hard for Philip Hammond to hit his target of bringing borrowing down to less than 2% of GDP by 2020-21.
The Bank of England has revealed that all UK banks have passed their stress tests, for the first time. Mark Carney said that UK banks would be able to continue to lend money to support the UK economy even in the unlikely event of no Brexit deal being reached.
The worst case scenario stress tests included a 33% fall in house prices, a rise in interest rates from 0.5% to 4% within two years, and the unemployment rate rising to 9.5% from its current rate of 4.3%
In the Eurozone, the economy continues to strengthen with the IHS Markit Purchasing Managers Index showing the regions business enjoyed their best monthly performance in six and half years and main indicators of output, demand, employment and inflation were at multiyear highs. The PMI surveys are viewed as reliable indicators of economic growth and the latest data point to a further pick-up in GDP growth after a strong third quarter. Chris Williamson, HIS Markit chief business economist, said “The message from the latest Eurozone PMI is clear: business is booming”.
The IHS Markit/CIPS UK manufacturing Purchasing Managers’ Index (PMI) reached 58.2 in November, its highest level since August 2013 and the tenth best registered reading in the surveys 26 year history. Stronger inflows of new orders, both foreign and domestic, caused the work backlog at UK factories to increase for the first time in six months. Increased demand combined with tighter capacity encouraged companies to increase employment with the rate of job growth the highest since June 2014.
Rob Dobson, Director at IHS Markit, commentated that “UK manufacturing shifted up a gear in November, with growth of output, new orders and employment all gathering pace. On its current course, manufacturing production is rising at a quarterly rate approaching 2%, providing a real boost to the pace of broader economic expansion”.
Over in the US, economic growth continues to be stronger than expected with third quarter GDP annualised growth revised up from 3% to 3.3%, and up from the 3.1% annualised growth reported in the second quarter. The expectation that the major hurricanes that the US has suffered this year would stunt economic growth has so far not come to fruition.
The biggest boost came from an improvement in business investment which contributed 1.2% to the growth, up from the previous estimate of 0.98%. The US Federal Reserve is widely expected to increase interest rates next month, for the third time this year, and the US economic growth data only serves to reinforce the likelihood of this.
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, the economy has remained surprisingly resilient with the Purchasing Managers Index (PMI) increasing from 51.6 in October to 51.8 in November.
Liu Xuezhi, an economist with the Bank of Communications, said the PMI “suggests that growth momentum held up well in the final quarter despite all these headwinds”.
In Japan, Gross Domestic Product (GDP) grew at an annualised rate of 1.4% between July and September. This was the seventh consecutive quarter of growth for Japan marking the longest period of growth in over a decade. The expansion was driven primarily by exports and stronger global demand for Japanese products which helped to offset a dip in consumer spending in the domestic market.
Martin Schulz, senior fellow at the Fujitsu Research Institute in Tokyo, said with the “world economy recovering almost in sync and with expansions from the US through Asia to the European Union, this helps Japan’s exporters tremendously”. David Kuo, chief executive of the Motley Fool Singapore, agreed the numbers were positive but that “Japan is not out of the woods yet” as inflation and domestic consumer spending is still weak.
In the UK housing market, house prices increased in November by 2.5% on an annualised basis, according to data from the Nationwide Building Society. While steady, the figure is lower than the 2.7% forecast by economists in the Reuters poll and marks a sharp decline from the 4.4% annualised growth recorded in November 2016.
Robert Gardner, Nationwide’s chief economist, gave his thoughts on the data saying that “Low mortgage rates and healthy rates of employment growth are providing support for demand, but this is being partly offset by pressure on household incomes, which appear to be weighing on confidence”.
The benchmark 10 year UK Gilt yield stands at 1.31% at the end of November, a moderate decrease from 1.33% at the end of October.
£1 currently buys $1.3529 or €1.1332. The Forex Gold Index is $1,283.85/oz and the Silver Index is $16.57/oz. Brent Crude Oil Spot is currently $58.59/barrel.
