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UK GDP Growth Increases

14 Aug 2018

Jack Turner, Research Analyst

This week we look at UK GDP, and review how some of 7IM’s holdings have helped portfolios following the Turkey-Trump tirades. We also flag other events affecting financial markets and highlight three taking place this week.

UK GDP Growth Increases

The Office for National Statistics (ONS) stated that UK GDP growth for Q2 2018 came in at 0.4%, higher than the Q1 figures, but below the Bank of England estimate of trend. Noting that the warmer weather and World Cup celebrations had played a part, the statistics office flagged that the service sector (which accounts for almost 80% of the UK economy) grew 0.5%, construction rose 0.9%, but industrial production fell 0.8%. While wages have increased, household spending has not increased as much as predicted.


NEWS

UK
The Office for National Statistics (ONS) published the latest UK trade deficit numbers that showed that the gap had widened by £4.7 billion to £8.6 billion in Q2 2018, due mainly to falling goods exports and rising goods imports. While the value of Sterling has depreciated and has remained low, exports have failed to pick up to the same extent as they have in previous periods, to similar levels of currency depreciation in the UK.

GERMANY
The country’s industrial production fell by 0.9% in June, lower than the 0.5% consensus view. There was further bad news when factory orders plunged 4% in June as overseas demand fell on the back of international trade tensions. While exports were overall flat in June, imports rose by 1.2 per cent to reach the highest monthly value since records began in 1950. The production of consumer goods meanwhile fell by 1.6%. June’s bad numbers came on the back of an increase of 2.4% in May, meaning that production for the year so far is still up by 2.5%, and order books remain full.

US
Ahead of the Q2 earnings season, there had been fears that the rising US Dollar and slower global economic growth would have a negative impact on companies in the S&P 500 given their higher international revenue exposure. Now, some 90% of S&P 500 companies have reported Q2 results, of which 70% have reported a positive earnings’ surprise and 72% have reported positive sales surprises. Net profit margins have hit 11.8%, which is the highest level since data records began in 2008. Meanwhile, those with higher international revenue exposure have also outperformed those with lower global reach.


PORTFOLIO ACTIONS

7IM portfolios benefitted from the holdings in Yen, US Dollars and US Treasuries, as concerns over Turkey and Trump boiled over. As a result the Turkish Lira fell further, having already dropped in value versus the US Dollar by as much as 40% over the course of the year so far. The depreciation in turn put pressure on Turkish companies, which hold large levels of unhedged Dollar and Euro denominated debt on their books.

Markets are waiting for a response from the Government, while the Central Bank stepped in to cut reserve requirements for banks to release money into the financial system. However, they failed to hike interest rates which some investors believe is the only way to halt the Lira’s slide. It is feared that the crisis could spill into other emerging markets and the EU banking sector, given its exposure to Turkey.


THREE ANNOUNCEMENTS DUE THIS WEEK

14 Aug – EU GDP Q2 Growth Rate 2nd Estimate // 15 Aug – UK Inflation Rate (Jul) // 15 Aug – US Retail Sales (Jul)

SOURCES: BLOOMBERG, DESTATIS, REUTERS, ONS, 7IM

 

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The value of your investments and the income from them may go down as well as up, and you could get back less than you invested.
The value of your investments and the income from them may go down as well as up, and you could get back less than you invested.

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