The Year Ahead

Record Highs End 2017

Ben Kumar, Investment Manager

Happy new year from the team at 7IM who mark the start of the year with the latest update on investment news out of the EU, UK and US.

Record Highs End 2017

Last week, the benchmark FTSE 100 share index ended 2017 at 7,687.77. Meanwhile, the FTSE 250 ended at 20,726.26. The strong year, however, was not as good as many other stock markets: in the US, the tech-focused Nasdaq rose more than 1,740 points (about 28%); and The Dow Jones Industrial Average gained about 25% over the year, adding more than 4,830 points to close at 24,719. The S&P 500 added more than 400 points to close at 2,673.6.


NEWS

UK UPDATE
Growth in British manufacturing abated in December from its four-year high in the previous month. The IHS Markit/ CIPS UK Manufacturing Purchasing Managers' Index (PMI) fell to 56.3 in December from November’s 58.2. The UK's PMI is now four points below that of the Eurozone – the biggest gap in performance since June 2008. However, while growth in new business, output, export orders and employment all slowed in December, the PMI remained above its average for the whole of 2017. British factories, which account for 10% of total economic output, have also seen a boost by a resurgence in European growth, and over 50% of [British] companies expecting production to be higher a year from now according to the survey.

EU UPDATE
Eurozone manufacturers ended 2017 enjoying activity at its fastest pace in more than two decades. According to the bloc’s IHS Markit December's PMI, December recorded a level of 60.6 – the highest since the survey began in June 1997. Within the region, Germany’s numbers are particularly strong. Its factory growth hit a record high, thanks to strong foreign demand, with manufacturing jumping to 63.3 in December, from 62.5 in the previous month. Meanwhile in France, manufacturing finished on its strongest footing in over 17 years, rising from 57.7 in November to 58.8 in December.

US UPDATE
New homes sold in the US at their fastest pace since 2007 in November, coming at an annual rate of 733,000 last month, up 17.5% from October and 26.6% from 12 months earlier, the US Census Bureau said. However, the sales level remains significantly lower than it was before the housing crisis and recession. While new home sales are a tiny slice of the overall housing market in the US, they are considered an important indicator of economic health.


PORTFOLIO ACTIONS
In addition to the changes detailed in our equity holdings, the team has also reduced our position in gold. Although we still believe that tail risks exist and want to provide some protection to portfolios, the rising interest rate environment means that gold is slightly less likely to offer that protection element versus other investments. The proceeds made from the sale have been used to buy Put options for the Euro Stoxx 50. These allow us the option to sell our European equity assets at an agreed price on or before a particular date. And while we have paid a small amount of premium for the Puts, which struck at a level 8% below the then index price (mid December), the team felt the move was justified. European equity is our most significant overweight in the medium term, but we wanted to buy some cheap protection against short-term negative moves.


THREE ANNOUNCEMENTS DUE THIS WEEK
04 Jan – UK Services PMI (Dec) // 04 Jan – Eurozone Composite PMI Final (Dec) // 05 Dec – US Unemployment Rate

SOURCES: BLOOMBERG; REUTERS; 7IM

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