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UK Investment Markets: Weekly Update – July 8th 2019

In this week’s market update I wanted to take a snapshot of global investment markets, economy and commodities as we enter the second half of the year.

  • The FTSE 100 index of leading UK company shares closed at the end of June at 7,425.63 points, rising during the month. The index was up by 263.92 points or 3.69%, making up for lost ground the previous month.
  • UK stocks ended the first half of 2019 in positive territory, with trade tensions between the US and China starting to ease. Improved investor sentiment led to a rally for global stock markets.
  • US President Donald Trump made concessions to China’s Xi Jinping during the G20 summit, with an agreement to delay the introduction of new tariffs, and also relaxing previously announced restrictions on the Chinese tech firm Huawei.
  • China agreed to buy US farm products as part of renewed negotiations between the two giant trading partners. Despite a more positive tone between the US and China, analysts remain cautious about the conclusion of the renewed talks, with no deadline set for a deal.
  • In the UK, uncertainty over the outcome of Brexit remains the big worry for investors as we enter the second half of the year. Investment fund providers seem split between the opportunity to snap up cheaper stocks and caution in the face of an uncertain political and economic outlook.
  • Relative to their European peers, UK company shares underperformed in the first half of 2019. The FTSE 350 index returned around 10% in the first half, compared with 13% from the Stoxx 600 index of European stocks. The largest companies in Germany, France and Italy all grew in value more quickly than FTSE 100 companies as a whole in the first half.
  • Global investor confidence rose during June, according to a respected survey by State Street Global Investors. Their confidence index reached 87.6 points, up 8.2 points from May’s revised reading of 79.4. Investors across all regions expressed a greater appetite for risk.
  • Lending growth in the Eurozone was steady in May, with a broader money supply indicator growing faster than expected. This M3 measure of money supply often leads to future economic activity, so the data has taken the pressure off the European Central Bank to introduce further monetary stimulus.
  • The latest official figures show household lending in the Eurozone economy rose by 3.3%, with corporate lending rising by 3.9%. Corporate lending in the Eurozone remains below its pre-global financial crisis peak but continues to confound expectations of a slowdown.
  • The OPEC group of oil-producing nations is expected to extend production cuts into next year, to support prices in the face of weakening global demand and higher shale output in the US.
  • OPEC originally agreed to cut production in 2017 as a short-term solution to deal with excess global stockpiles of oil. Production cuts have since continued to maintain the oil price with rising supplies of shale. Prices have been maintained, but OPEC now has the lowest share of the global oil market since 1991.
  • The benchmark 10-year government bond (gilt) is yielding at 0.82% at the start of July, down slightly over a month as investors continue to look to the UK bond market as a safe haven.
  • £1 currently buys $1.2528 or €1.1159. The Forex Gold Index is $1,390.30/oz, and the Silver Index is $15.26/oz.

Outlook for the UK Economy for the Rest of the Year

The outlook for the UK economy remains guarded, with a sharp decline in summer clothing sales reported in May, following a spell of unseasonably cold weather. According to the Office for National Statistics, retail sales fell by 0.5% in May when compared to a month earlier. This was the most significant monthly decline in sales to date in 2019 and the second consecutive month sales have fallen.

Economic growth in the UK, as measured by GDP, rose by 0.5% in the first quarter of the year, but economists are predicting weaker growth for the rest of the year. UK manufacturing is facing a tough time, reporting its lowest output level last month since February 2013. The latest IHS Markit purchasing managers’ index reported a score of 48, a 76-month low. An index reading below 50 represents contraction.

Falling manufacturing output in the UK follows a period of stockpiling ahead of the original Brexit date since delayed. New business orders for the manufacturing sector have fallen to a 7-year low. Rob Dobson, director at IHS Markit, said: “The downturn in UK manufacturing deepened during June, as the impact of firms unwinding stockpiles built before the original Brexit date continued to reverberate through the sector and exacerbate weak demand. There will need to be a substantial improvement in economic conditions at home and overseas, alongside reductions in both Brexit and domestic political uncertainties, if manufacturing is to see a sustained revival in the coming quarters.”

UK House Prices

The latest house price index from Halifax showed average prices rising by their fastest rate since the start of 2017, in the quarter to the end of May. This strong annualised growth figure of 5.2% was, however, flattered by weaker growth a year earlier.

According to Halifax, monthly prices rose by 0.5% in May, with economists predicting a fall. Halifax managing director, Russell Galley, said: “The overall message is one of stability. Despite the ongoing political and economic uncertainty, underlying conditions in the broader economy continue to underpin the housing market, particularly the twin factors of high employment and low-interest rates.”

Amanda says: I’ve mentioned my distrust of UK employment figures which do not factor in zero hours contracts or correlate as they should with inflation which should be through the roof. All we have to do is look retrospectively 40 years ago when employment figures were at similar levels to today and inflation was at more than 25%! It makes sense that if more people are in work, there is more disposable income in the system enabling people to consume more products and goods. The net result is that inflation rises as things become more expensive in line with increased demand. Why is this not being correctly reflected by economic indicators coming out from the UK? The answer is because the data has been manipulated to create a very different impression.

Price inflation in the UK fell to 2% in the year to May, reducing the chances of the Bank of England hiking interest rates. Inflation fell due to lower travel costs, car and clothing prices. There was some upward pressure on price inflation due to higher recreation and culture costs. However, the reality is that people just don’t have as much money to spend as the British government would like us to believe.

When housing costs are included, the Consumer Prices Index (CPI) measure of price inflation fell to 1.9% in the 12 months to May, down from 2% in April.

How to Keep your Savings and Investments Safe Whatever Happens

Investor Live was founded with the mission of providing information and resources to help normal people save and invest their money wisely. Retail investors are fortunate to have the opportunity to invest in big assets without taking all the risk on themselves as sole owners.

We always recommend products that give you fixed returns which is never more important than when financial markets are shaky. Although you won’t earn the returns you will for a high-risk opportunity, you at least know you are not likely to lose all your money.

Preferably, you want to keep your money locked into an instrument that is going to give you exactly what you calculate it to when you invest your money. Products with terms of around 12-24 months that have underlying real estate assets are the best bet for keeping your hard-earned capital as safe as possible as the post-Brexit dust settles, (God willing).

About the Author

Amanda Wright is a former risk analyst at Bankers Trust, with specific experience of mergers & acquisitions and corporate finance. As a contributor to Investor Live, Amanda provides valuable insights into the technicalities of fundamental analysis in a way that is easy to understand, to provide retail investors with the tools to make considered investment choices.