This week we provide an update on our portfolio actions, inflation and Purchasing Manager Indices for the Eurozone, UK and US.
INFLATION ON THE RISE
While inflation is hitting the headlines here in the UK, it’s also increasingly making headlines on the Continent and the US. Good economic growth has translated through to much higher expectations of inflation hitting especially as December 2016 numbers are announced.
UK PURCHASING MANAGER INDEX ACCELERATES
The UK ended 2016 with a period of strong expansion according to the Markit / CIPS UK Purchasing Managers Index (PMI), marking the strongest quarter of the year and the highest level since July 2015. The Services PMI rose to 56.2, up from 55.2 in November. The index also showed though that inflationary pressure in the sector continued, as prices rose at their fastest rate since April 2011. The growth followed a similar pattern to the PMI surveys in the construction and manufacturing sectors. This left the ‘all-sector’ PMI at 56.4 in December, up from 55.1 in the previous month and again the highest reading since July 2015.
US PMI STRONG
The seasonally adjusted final Markit US Composite PMI registered 54.1 in December, down slightly from 54.9 in November but above the important 50.0 no-change mark for the 10th consecutive month. Moreover, the average reading for the final quarter of 2016 (54.6) was the strongest since Q4 2015. Survey respondents noted that improving domestic economic conditions and greater consumer spending both supported higher levels of business activity.
EUROZONE PMI ALSO RISES
Further evidence of continued growth in Europe came from the Eurozone (EZ) Composite PMI. Standing at 54.4 in December, and up from November’s and the consensus 53.9, the final number for 2016 signalled the fastest rate of output for 67 months as manufacturing increased at its fastest pace since April 2014. The service sector also fared well coming in at 53.7, which was above the consensus of 53.1 and in line with the November number of 53.8. Growth was good across the board for the main EZ economies, with Germany and Spain both registering solid jobs’ growth in December, while France and Italy also increased albeit marginally
As part of the review of the allocation to Europe, which saw equity positions increased to overweight (versus our strategic asset allocation position), the team also took the decision to take profits on the 2018 Dividends futures contract and sell out of the position. The investment returned 11% since it was made in March 2016 versus the 8% increase that the underlying Euro Stoxx 50 returned, and with a smoother, less volatile return profile in the later months of last year.
We continue to hold a 2019 contract of the same asset and will decide in the next month whether we should be allocating more to that or whether to invest in a 2020 contract, evaluating whether the discount is dominating returns more than the market could.
THREE ANNOUNCEMENTS DUE THIS WEEK
11 January – UK Balance of Trade // 12 January – ECB Monetary Policy Meeting Accounts // 13 January – US Retail Sales
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SOURCES: BLOOMBERG; 7IM