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Inflation Inches Higher

Ben Kumar, Investment Manager

This week we look at inflation in the UK, as well as other news out of the UK, EU and US. We also highlight some changes to the portfolios.

week at a glance

Despite statements that inflation had peaked at 3%, the figure moved higher in November to 3.1% forcing Mark Carney to write a letter to the Chancellor, Philip Hammond, to outline why the central bank has missed its inflation target. Meanwhile, average weekly wages rose by 2.3% in the three months to October, meaning that in real terms, wage growth remains negative. The inflation increases continue to be blamed on the value of Sterling after the vote to leave in June 2016.


NEWS

UK UPDATE
Nearly a decade of improvements in household finances has started to turn in the year following the EU referendum, according to latest six monthly survey of 6,000 households by the Bank of England. Its latest report detailed the highest percentage of households reporting mortgage debts of more than four times earnings since 2013 and that those with debt repayments representing more than 40% of income had risen over the past year, although the level was still below average levels. In addition, for the first time in the past three years, the balance of households expecting an improvement in their financial position had turned negative.

EU UPDATE
European Central Bank (ECB) president Mario Draghi hailed the “strong pace of economic expansion and a significant improvement in the growth outlook”. However, he noted that muted domestic price pressures had “yet to show convincing signs of a sustained upward trend”, making it important to continue the bank’s asset purchase programme despite the differing opinions among ECB policy makers. Its latest forecasts suggest that the region’s headline inflation figures will finish the year at 1.5%, before dipping to 1.4% in 2018 and then recovering to 1.5% and 1.7% in 2019 and 2020 respectively. The Bank also made it clear that inflation could exceed its target over the short-to-medium term.

US UPDATE
The Federal Reserve lifted base interest rates by 25bps to the range of 1.25% to 1.50%, making its third (and expected) such move in 2017. It also left forecasts for the next two years unchanged, stating that it expects three more rises in 2018 and two in 2019. It increased its growth projections for 2017 and 2018 to 2.5%, due to the impact of tax cuts, but added that it continued to expect that inflation would stay below its target.


PORTFOLIO ACTIONS
We expect to keep seeing synchronised global economic growth in 2018, with most countries in the world growing at or around long-term averages and so have allocated more to equities although we do not feel the need to chase the market. Two actions included:

  • Increase UK mid cap: for the first time in a while, FTSE 250 valuations look better than the FTSE 100, and very attractive versus other global mid cap markets. A softer Brexit is now more likely, earnings growth is solid, and so a zero weight compared to our Strategic Asset Allocation (SAA) can’t be justified.
  •  Increase Emerging Markets Equity to neutral: we trimmed from an overweight position last quarter, and saw the market move sideways. However, earnings growth has continued, and so we feel a move back to neutral versus the SAA is justified.

THREE ANNOUNCEMENTS DUE THIS WEEK
21 Dec – Eurozone Consumer Confidence Flash // 21 Dec – US New Home Sales // 22 Dec – Final UK Q3 GDP Growth

SOURCES: BLOOMBERG; FT; 7IM

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