A brief insight into the latest market dynamics and details of any changes occurring within our model portfolios.
POLITICAL UNCERTAINTY IMPACTS BUSINESSES
The snap election result led to a dramatic drop in business confidence according to the Institute of Directors (IoD). While there was also no desire for a follow-up election, business leaders believe that the political uncertainty could cause them major headaches, particularly given the lack of direction for Brexit negotiations and the absence of clarity on the status of EU workers employed in Britain. Other surveys echoed the IoD results, as well as flagging the fact that UK businesses may face higher wage bills through lower migration and increases in the minimum wage due to political pressure.
EUROZONE ECONOMIC GROWTH STEADIES
The European Central Bank (ECB) has increased its economic forecasts for the region for 2017 to 1.9%, up from the 1.8% predicted in March. The ECB also increased its growth projection for 2018 to 1.8% from 1.7% and for 2019 to 1.7% from 1.6%. In further news, the ECB kept interest rates on hold as it downgraded its inflation target for 2017 to 1.5% from 1.7%.
US INTEREST RATE RISE
The Fed has raised interest rates this week by 0.25%. This comes on the back of a record run of jobs growth in the US with unemployment down to its lowest level in 16 years. The committee signalled that more rises are on the horizon and that it “expects that economic conditions will evolve in a manner that warrant gradual increase in the federal funds rate”.
Gary’s market comments in conjunction with our investment partners
UK domestic equity in focus
Last week, the result of the UK General Election revealed a dissatisfaction with Prime Minister Theresa May and her proposed ‘hard’ Brexit, as she lost her majority in Parliament. The impact of this is a potentially ‘softer’ Brexit deal with the European Union. Sterling fell in response to the result on Friday reflecting nervousness of investors at the prospect of a hung parliament. If the coalition government does now head towards a softer Brexit deal, we may well see Sterling rise again to pre-election levels, however there is also a strong possibility that the political chaos we find ourselves in will take Sterling lower. A fall in the value of Sterling, as we know, benefits the majority of the FTSE 100 companies via overseas revenue then translated back into GBP. Therefore the stability of the FTSE 100 since the General Election vote may well be masking concern by investors about the future prospects of the UK economy with a coalition government and a now undefined Brexit collision course.
In response, within the MPS and Volare portfolios we are selling the holding of Marlborough Multi Cap Income which was held in the Balanced, Growth and Adventurous portfolios. The fund is biased towards small and mid-cap names in the UK domestic space. It has had a phenomenal run since the beginning of the year, up over 12%. Over the past three years the fund is up over 26%, a strong contributor to the portfolio performance over that period.
7IM’s investment team were on call during the election, staying up in the office all night should portfolio changes have been required.
Ahead of the vote, Bloomberg published a consensus of opinions on the potential outcomes – one of which included the view that the value of the Pound to the US Dollar would fall to $1.235 in the case of a hung parliament. However, while the Pound did slide in value on the night of 8/9 June, it was not by as much as had been initially feared. This may be because the market appreciates that a Tory government typically means a higher level for Sterling than a Labour Government often does. The lack of a majority means that May’s hard Brexit strategy may be derailed and that instead negotiations pave the way to a soft Brexit with Britain remaining in the Single Market.
7IM are keen to increase their exposure to Sterling at selective entry points.
Sources: LGT Vestra and 7IM