This week, 7IM provides an update on house prices, and gives three updates of economic interest for the UK, EU and US. In addition, we provide an overview of the latest changes in our portfolios for our US investments.
House price rises in the UK slowed in the year to the end of May – increasing by 1.9% in the three months to May year-on-year, versus six months earlier when growth rate for the three months to November 2017 was 3.9%. Meanwhile, the month-on-month data returned to a positive number of 1.5% versus the -3.1 figure for April, and the three month on three month % change turned positive after a three releases of negative numbers.
The UK Services Purchasing Managers’ Index rose to 54 in May, up from the 52.8 number published in April, marking a rebound towards the 54.5 number for March. It follows a recovery in the manufacturing and construction sectors, taking the ‘composite’ index to the highest level year-to-date. The news was seen to vindicate the Bank of England’s view that the first quarter slowdown was an aberration, due mostly to the cold weather brought by the “Beast from the East”. Retail sales jumped to a four-year high of 4.1% in May compared to a year earlier, helped by warmer weather, bank holidays and the royal wedding.
The final reading of the Eurozone’s first quarter GDP showed the Eurozone economy grew 0.4% in Q1 2018, its weakest pace since Q3 2016. It was, however, 2.5% higher than the seasonally adjusted figure for the same quarter in 2017. Hopes that economic momentum would pick up in the second quarter were dashed when industrial production fell 1.0% and 0.5% over April in Germany and France respectively. Both figures were weaker than expected, while new factory orders in Germany also disappointed as they fell for the fourth month in a row in April, declining 2.5%. Data for March was also revised lower to a -1.1%, compared to the initial estimate of -0.9%.
The ISM Non-Manufacturing Purchasing Managers' Index to a stronger-than-forecast 58.6 in May, compared to a dip to 56.8 in April, as the overall economy grew for the 109th consecutive month. The Production Index registered 61.5%, a 4.3% increase compared to April, and the New Orders Index registered 63.%, an increase of 2.5 points from April’s figure, among the sub indexes of the overall survey. Of the 18 manufacturing industries, 16 reported growth in May.
The team has taken profits on their US small cap exposure in the Russell 2000 index after outperformance of 5%, versus the large cap S&P500 over the year so far. The position was originally put in place just after the US Presidential election in November 2016, given Trump had talked about tax cuts and deregulation in his campaign platform.
Small cap stock prices have risen to such an extent that the team does not see the same justification for further outperformance from here. Therefore the team has cut all of their exposure to the Russell 2000 and reinvested the proceeds in the S&P 500 Index. After the sell offs we’ve seen this year in the S&P 500 we are more comfortable investing at current levels and believe that strong macro and earnings seen so far should bode well for future returns.
THREE ANNOUNCEMENTS DUE THIS WEEK
05 Jun – UK Markit/CIPS Services PMI (May) // 05 Jun – EU Retail Sales (Apr) //
06 Jun – US Balance of Trade (Apr)
SOURCES: BLOOMBERG, IHS/MARKIT, REUTERS, 7IM
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