This week, we review UK inflation, Brexit negotiations, the latest in the trade war and lower EU growth expectations. We also look at where markets moved and review an action for the 7IM portfolios.
Against expectations that the Consumer Prices Index would rise to 2.6% in June, the latest figures from the Office for National Statistics showed that inflation instead came in at 2.4%, largely as a result of the lower cost of summer clothes. The figures also mean that wages remain ahead of inflation even though the growth slowed to 2.7%. As the news followed drop in retail sales, which fell 0.5% month-on-month, there is a now a view that the Bank of England may hold off raising rates in August to ensure it does not stop growth.
Theresa May’s plan for Brexit received a weighted response from negotiators in Brussels – while there were efforts to state that there had been some progress, officials were quick to highlight that the proposals raised yet more questions as to how the deal would work in practice. The Prime Minister was, meanwhile, forced to make concessions to both Leavers and Remainers, and only narrowly survived a vote which would have kept the UK in the EU customs union if no deal was reached by March 2019. Both the UK and EU appear to be stepping up preparations for a ‘No-Deal Brexit’.
The level of vigor in the Eurozone economy appears to be fading slightly as the latest results of the European Purchasing Managers’ (MI) index were analysed as the headline number fell from 54.9 in June to 54.3 in July. The lower numbers in particular will be seized upon by the European Central Bank who are keen to stop the Quantitative Easing programme and begin to normalise interest rates, but can only do so if the economy can support the measures. The figures in Germany, however, bucked the broader regional trend as the local index rose from 54.8 in June to 55.2 in July
Donald Trump indicated that he was ready to intensify his trade war with China by slapping tariffs on all US$500bn of imports from the country. He also said that he was "not happy" about the moves by the US Federal Reserve to raise interest rates and expressed unhappiness with the strength of the US Dollar against the Euro and the Renminbi. Currently, the Trump administration has put tariffs on US$34bn worth of Chinese products, however, and while he talked about imposing a 10% tariff on a further US$200bn, the latest statements would mean an all-out trade war. China has remained quiet and will be thinking through how else they can respond given they ‘only’ import US$130bn of goods.
In December 2016, 7IM’s investment team took the decision to reduce the allocation to Real Estate Investment Trusts (REITs) to zero. Since that date, the sector has underperformed equities by around 10% given investors looked to shun any investments that could be seen as bond proxies. In addition, the UK real estate market has seen a negative impact because of uncertainty around Brexit.
Now, however, we believe that there is an opportunity given that REITS provide investment returns similar to the recent levels of equity markets, but can often have a lower correlation due to the fact that the returns stem from a diverse index where the underlying investments each operate different business operating models from one another. Meanwhile, the contractual leave obligations provide for a stable income that appeals.
THREE ANNOUNCEMENTS DUE THIS WEEK
25 Jul – US New Home Sales (Jun) // 26 Jul – EU Interest Rate Decision // 27 Jul – UK Nationwide House Prices (Jul)
SOURCES: BLOOMBERG, EUROSTAT, REUTERS, ONS, 7IM
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