Monthly Investment Update February 2018
In our monthly investment update February 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 January at 7,533.55, down from 7,697.62 points at the end of December, a decrease of 164.07 points or 2.21% during the month.
The UK economy expanded by a better than expected 0.5% in the final quarter of 2017, according to the most recent Office for National Statistics (ONS) data. The expectation by economists was an expansion of 0.4% for the period.
Darren Morgan, head of Gross Domestic Product (GDP) at the ONS, commented that: “The boost to the economy at the end of the year came from a range of services including recruitment agencies, letting agents and office management”.
However, the ONS added that the broader picture was “slower and more uneven growth”. The UK economy grew by 1.8% in 2017, the slowest level of growth since 2012.
The latest inflation figures from the ONS saw a slight dip during December, down from 3.1% to 3%. The ONS said that while there was an increase in the price of air fares last month, it had a smaller impact than at the same period in 2016. It added that the price of toys and games saw a drop in price in December, contributing to the overall decrease.
The Bank of England has previously stated that they believe inflation hit its peak at the end of 2017 and the bank expects a gradual fall towards its target of 2% over 2018. However, the ONS commented that it was too early to say whether Decembers decrease was the start of a longer term fall.
The pound rose past the $1.40 mark versus the dollar during January. Since the fall in the value of the pound to below $1.20, following the Brexit vote in July 2016, sterling has been making a steady recovery. Analysts cited a number of factors that contribute to the pound rise against the dollar including progress on Brexit negotiations.
However, others such as Trevor Greetham of Royal London Asset Management said the pound’s strength was better explained by a weaker dollar. He commentated “There’s not been any radical change in Brexit talks”, adding that otherwise the pound would have gained more against the euro, which has remained largely flat since the EU referendum.
Data from the latest IHS Markit/CIPS UK manufacturing Purchasing Managers’ Index (PMI) shows a further easing in the rate of expansion, with the rate falling from 56.2 in December to 55.3 in January, its lowest level since June 2017. However, the PMI remains well above its long run average of 51.7, and manufacturing output continues to rise at a solid pace.
Duncan Brock, Director of Customer Relationships at the Chartered Institute of Procurement & Supply, commented on the PMI data saying that “Growth in the manufacturing sector continues to provide positive encouragement for the UK economy as the year started on a positive, if a slightly reserved note.”
In the Eurozone, the economy grew by 2.5% in 2017 according to figures published by the EU’s statistic office Eurostat. This puts growth at its best level in over a decade with the Eurozone also outpacing the US economy which posted economic expansion of 2.3% in 2017.
Over in the US, the economy slowed unexpectedly in the last three months of 2017, only managing annualised growth of 2.6% in the period. Economists has expected growth to be on par with the previous quarter’s rate of 3%. A surge in imports was highlighted as the main driver behind the slowdown, meaning growth for 2017 came in at 2.3%, 0.7% short of President Trumps 3% target.
Despite the blip in growth at the end of 2017, economists expect the US economy to meet the 3% expansion target during 2018, supported by the weaker dollar, rising oil prices and a strong global economy.
Staying with global growth, the World Bank announced their latest forecast for world economic growth predicting expansion of 3.1% in 2018. It stated that growth had been better than expected in 2017 and would speed up during 2018 with it being the first time since the financial crises that growth is operating at its full potential.
The World Bank report warned that it expected a slowdown in the long term though, with the world economies potential growing more slowly than it used to. This is a result of years of poor improvements in productivity, weak investment and an ageing workforce. The bank stated that the slowdown in prospects is widespread with the countries it affects accounting for around two thirds of global economic activity.
Turning to China, economic growth for 2017 was 6.9%, according to official data. This is the first year-on-year increase in growth since 2010 and beats Beijing’s official annual expansion target of 6.5%. However as Beijing increases its efforts to reduce risky debt and to increase air quality, analysts said this may impact growth in 2018.
There are also those who believe that China’s GDP numbers may not be as strong as reported. Earlier in the month the governments of Inner Mongolia and of the large industrial city of Tianjin have admitted their economic numbers for 2016 were overstated.
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. In January, the Nikkei 225 index of leading Japanese shares, reached just shy of 24,000, its highest level since 1991.
In India, economic growth for 2017 was an annualised rate of 6.5%, slower than in more recent years. The slowdown has been blamed on several factors, including declining exports, falling private investment, the sudden cancellation of nearly 86% of the cash in circulation in November 2016 – the effect lasted until 2017 – and glitches in the rollout of a single Goods and Services Tax (GST).
The Indian government predicts that economic growth will increase in 2018 to between 7% and 7.5%.
Abheek Barua, chief economist of HDFC Bank told Reuters news agency, said “It’s a conservative and credible band. There could be a potential upside from here if oil prices moderate quite substantially and you see a pickup in domestic demand components.” The forecast is also in line with the International Monetary Fund (IMF), who project the Indian economy to grow at a rate of 7.4% in 2018.
Returning to the UK, the housing market saw a sharp slowdown during 2017, according to data released by Halifax, the UK’s largest mortgage lender.
Halifax reported average price growth of 2.7% across the UK in 2017, down from 6.5% in 2016, the slowest rate of growth since 2012. It gave a squeeze on real wage growth and continuing uncertainty over the economy as the main driving forces behind the slowdown.
House prices for 2018 are not expected to improve either, according to new forecasts from Fitch, the ratings agency. The annual housing and mortgage outlook predicts house prices in the UK will be flat in 2018, with declines in London and the South East due to “Brexit uncertainty, stretched affordability and low income growth”.
The only housing markets assessed by Fitch with a worse outlook for 2018 were Greece, where it predicted a 2 per cent decline, and Norway, where prices could drop 5 per cent.
The benchmark 10 year UK Gilt yield ended January at 1.50%, an increase from 1.19% at the end of December.
£1 currently buys $1.4202 or €1.1425. The Forex Gold Index is $1,344.90/oz and the Silver Index is $17.23/oz. Brent Crude Oil Spot is currently $58.59/barrel.