Market round up 26 June 2017

26 Jun 2017

Ahmer Tirmizi, Investment Manager

This week, we provide an update on UK politics and a summary of key economic news out of the UK, the Eurozone and the US. We also give an overview of the first actions taken by the 7IM investment team following the conclusion of last quarter’s Tactical Asset Allocation discussions.


Dup deal done & dusted?

The much hyped ‘confidence and supply’ deal between the Tories and Northern Ireland’s (NI) Democratic Unionist Party (DUP) has finally been agreed. The deal comes just two days ahead of the vote on the Queen’s Speech, which should ratify a Tory-led government. However, Jeremy Corbyn is predicting that he will be in power in six months’ time, one month less than his predecessor Harold Wilson managed during his 1974 minority government and much less than the two years that James Callaghan survived after the Labour-Liberal collation pact collapsed in 1977. The DUP now need to finalise talks for their Stormont power-share in NI with Sinn Féin ahead of the 29 June deadline to avoid direct rule from Westminster.

The latest Lloyds Bank Business in Britain report flags that confidence among UK businesses has risen to 24%, double the level immediately following the EU referendum. Taking the form of an index measuring expected sales, orders and profits, the number is also slightly higher than the average 23% for that index over the 25 years that the report has been published. However, a report by the British Chambers of Commerce forecast weak economic growth and only ‘cautious’ optimism among the members it surveyed –optimism that is set to suffer due to the result of the general election.

Q2 2017 marked the best quarter collectively for the economies of 19 countries of the Eurozone since 2011 according to IHS Markit, which predicts that economic growth will be 0.7% versus the 0.6% recorded in Q1 2017. While the firm reported that its composite purchasing managers' index (PMI) dipped to 55.7 in June from 56.8 the previous month, the decline had been anticipated and the PMI remains significantly ahead of the 50 point level that denotes expansion.

The 34 largest US banks successfully completed the first round of the Federal Reserve’s latest annual stress tests. These examine how banks with US$50bn or more in assets would perform in hypothetical stress scenarios of a global recession, unemployment increasing by 10% and property values declining. The central bank calculated that the banking sector would suffer from US$493bn in losses in the simulated downturn, but would remain well capitalised. The results have led to some banks starting to seek to deliver more than the current limit of 100% of earnings to their shareholders. Others see this as the trigger for the Republican Party to start to repeal the Dodd-Frank Act. A second, more closely watched component is due later this week.

As a result of decisions taken in Tactical Asset Allocation meetings, 7IM portfolios will see the level of risk reduced across the board, selling riskier assets in favour of those with longer duration and safe havens such as gold. The first moves implemented by the team focused on equities. The team remains underweight the UK in light of concerns over the Brexit negotiations. The allocation to the US has been cut further, taking profits on the Russell 2000 ahead of the upcoming earnings season. The previous overweight on Japanese equities has been cut to neutral and, while we remain relatively positive on Europe, we have cut back our positions to a more modest overweight. Only Emerging Market allocations have remained untouched as we see Asia, in particular, more resilient to any global commodity slowdown and a potential developed market lull.

28 June –UK Queen’s Speech Vote // 29 June –Final Q1 US GDP Growth Rate // 29 June –Eurozone Business Confidence

* SNP –35 seats ** Rest –24 Seats;

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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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