This week covers Sterling’s recent rally, UK inflation, UK retail sales and the recent ECB meeting. Portfolio actions discuss the alternatives allocation.
STERLING RALLIES ON SPEECH
Theresa May’s speech on 17 January set out the path to a hard Brexit with the confirmation that Britain would leave the single market. However, there was also a decision to allow Members of Parliament to be able to vote on the final deal to be agreed. While the Commons and Lords cannot stop the UK leaving the EU and since there are more Remainers than Brexiteers, it is unlikely that they will vote through a deal that is a ‘bad’ deal in their view. Sterling rallied following the news, up from USD1.19 to USD1.25.
UK INFLATION INCREASES
UK inflation figures spiked to 1.6% according to the Office for National Statistics (ONS). The December number was up from November’s 1.2% and is now on a par with rates in July 2014. The increase was on the back of rising air fares and food prices, while petrol prices fell less than in December 2015 providing a smaller offset to the price hikes. Meanwhile, higher costs for imported materials and fuels pushed up producer prices. The price of goods bought from factories rose 2.7% in December year-on-year as manufacturers passed on the higher costs they’re facing due to Sterling’s depreciation.
RETAIL SALES DIP IN DECEMBER
UK retail sales fell 1.9% month-on-month according to the ONS. It’s the biggest fall in four and a half years and much bigger than the 0.1% drop expected by the consensus. Inflation is being blamed as higher prices mean households had less disposable income. Meanwhile, Black Friday’s success in November also led to fewer shoppers for the following month. However, year-on-year, December’s retail sales were up 4.3%.
RATES ON HOLD IN EUROPE
As expected, the European Central Bank (ECB) voted to keep its main interest rate unchanged at 0% for a further month. The committee also decided not to change its approach to quantitative easing. Its head, Mario Draghi, stated that while the Eurozone’s economy was stronger, it was still fragile. Noting that deflation risks had "disappeared" and that economic surveys were positive, he stressed that it was not a time for the ECB "to relax" and that the stimulus programme would continue and may even be increased if necessary as the Central Bank looked to use “all the instruments available within its mandate”.
7IM has added to their alternative strategies following six months of due diligence. The investments take advantage of the various types of risk premia including carry, momentum and value. To access these returns, we have two methods of implementation. The Asset Allocated Passive fund range has invested in a bond issued by Credit Suisse on 7IM’s behalf. This provides exposure to 12 separate alternative risk premium strategies that look to deliver a return of approximately 6% per annum with a volatility of about 8% over the same period. The Multi Manager fund range, meanwhile, has invested in Neuberger Berman’s recently launched Multi-Asset Risk Premia Fund and NN Investment Partners’ Multi-Asset Factor Opportunities. The former is more cautious than the latter, which was taken into account as we invested across our risk profiles.
THREE ANNOUNCEMENTS DUE THIS WEEK
25 January - Germany Ifo survey // 26 January - UK prelim. GDP Q4 2016 // 26 January - US Purchasing Managers’ Index
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Seven Investment Management LLP is authorised and regulated by the Financial Conduct Authority. Member of the London Stock Exchange. Registered office: 55 Bishopsgate, London EC2N 3AS. Registered in England and Wales number OC378740. The value of investments may fluctuate in price or value and you may get back less than the amount originally invested. Past performance is not a guide to the future. The investments may not be suitable for everyone and if you have any doubts you should contact your investment advisor.
SOURCES: ONS, BLOOMBERG; 7IM