In our latest monthly investment update for January 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 December with a new all-time record high, closing the year at 7,142.83 points. This represented a rise of 359.04 points or 5.29% during the month.
The index rose by 14% during the year, despite sharp falls in the days following the EU Referendum in June. It was the best annual performance for the FTSE 100 since 2013, with many of the UK’s largest companies benefiting from a weaker pound as they have earning in foreign currencies.
Pound Sterling is now down by 18% against the US Dollar since the EU Referendum and is down by 11% against the Euro.
By comparison, the FTSE 250 index, which features more UK based manufacturers and retailers than the FTSE 100, rose by around 3% in 2016, finishing the year at 18,077 points.
Oil prices have risen slightly in anticipation of an output cut agreed by OPEC nations, which came into force at the start of January. The group of oil producing nations agreed to cut oil production by 1.8m barrels a day from the start of the month. Russia, which is not a part of OPEC, also agreed to cut its output by 600,000 barrels a day.
As a result of the cuts, which represent around 2% of global production in 2017, analysts expect the oil price to be pushed higher towards $60 a barrel, a level last reached in the summer of 2015. Oil prices are expected to stay volatile in 2017, with agreements to cut output failing to hold in the past and US oil producers likely to increase their output.
In the UK, economic growth figures were revised upwards for the third quarter. The UK economy grew by 0.6% during the three month period, ahead of an earlier estimate of 0.5%.
According to new data released by the Office for National Statistics, the business and financial sectors were more active than previously estimated.
Despite this improvement in the third quarter, the ONS revised downwards growth estimates for the first quarter of 2016 from 0.4% to 0.3%, and for the second quarter from 0.7% to 0.6%.
New economic figures in Europe got markets off to a positive start in January. Data from the HIS Markit Purchasing Managers’ Index for the Eurozone rose to 54.9 in December from 53.7 in November. An index reading above 50 indicates expansion in activity in the manufacturing sector.
The combination of a weaker Euro and a policy of monetary easing from the European Central Bank is expected to support equity markets in 2017. However, there is political uncertainty in Europe with elections coming up this year in France, the Netherlands and Germany, all with the potential to upset the establishment.
The Italian banking crisis also continues to rumble along and the threat of global terrorism could unsettle investors across Europe this year.
The US economy enters 2017 in reasonably good shape, with falling unemployment, strong equity market performance and rising gross domestic product last year. All eyes will be on the inauguration of President Donald Trump later this month, with high expectations ahead of his policy announcements for businesses and the economy.
US Federal Reserve Chairman Janet Yellen has promised to raise the benchmark federal funds rate at least three more times in 2017. Equity markets were unfazed by the latest rate rise in December, as a strong domestic economy reduces the impact of these rate rises.
Looking to Emerging Markets, investor sentiment appears to be turning positive on improved risk perception and higher yields. The chief investment officer of Templeton Emerging Markets group, Stephen Dover, has pointed towards robust economic tailwinds as the basis for further strength in emerging market equities.
Overall, the investment firm expects to see gross domestic product growth for emerging markets in 2017 at a “solid and accelerating level, markedly above the rate expected from developed markets.” With GDP per capita still well behind developed markets, emerging markets continue to have strong long-term growth prospects.
The Organisation for Economic Co-operation and Development (OECD) has warned that global property prices could fall if markets overheat. The think tank is monitoring vulnerabilities in asset markets because of the higher price inflation and diverging monetary policies expected this year. The OECD highlighted a number of countries, including Canada and Sweden, where very high commercial and residential property prices were inconsistent with a stable real estate market.
House price growth in the UK is expected to slow down in 2017, with Halifax forecasting a rise of between 1% and 4% this year. The Halifax UK Housing Market Outlook contrasted this forecast with a nationwide average rise of 6% in 2016.
UK interest rates remained unchanged at 0.25% in November, with the next Monetary Policy Committee meeting not until January.
Bank of England Governor Mark Carney explained the Bank is willing to tolerate a bit of an overshoot in inflation over the course of the next year years in order to avoid rising unemployment. They seem to be prepared to keep interest rates low, rather than raise rates to tackle any rising price inflation, in order to maintain the best possible conditions for economy growth.
Price inflation in the UK, as measured by the Consumer Prices Index, was recorded at 1.2% for the year to November. This was up from 0.9% the previous month. The rate in November was the highest since October 2014, when it was 1.3%.
Rises in the prices of clothing, motor fuels and a variety of recreational and cultural goods and services, most notably data processing equipment, were the main contributors to the increase in the price inflation rate.
The Bank of England is forecasting a rise in price inflation this year, when it is expected to go above the Bank’s 2% target, before tailing off in 2019.
The benchmark 10 year UK Gilt yield stands at 1.239% at the start of January, falling during the past month.
£1 buys $ 1.22890 or € 1.17400. The Forex Gold Index is $1,159.10 /oz and the Silver Index is $16.24/oz.
