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Investment Market Commentary - August 2017

 

It has been a quiet summer for financial markets despite continuing geopolitical tensions in the Asia Pacific region.  The recent missile test by North Korea has further escalated the situation, a diplomatic solution is the most desirable outcome and financial markets continue to price this into asset prices.

BREXIT negotiations are continuing, with very little meaningful progress judging by the comments coming from the EU negotiators.  The Government’s stance appears to be softening, with both Philip Hammond and David Davis pushing for a transition period post the official exit date in 2019. This development seems to be calming UK equity markets as it looks unlikely that the Government will walk away from the negotiations with no deal in place as had been threatened before the recent General Election.

UK economic data is continuing to point to a domestic economy where growth is slowing. Recent GDP data showed that the economy grew by 0.3% in the second quarter, less than half the rate of growth seen in the fourth quarter of 2016. The most worrying sign for investors was that the record weakness in Sterling is not fully benefiting businesses. In the second quarter, business investment and net trade made no contribution to economic growth.  Government spending and household expenditure continue to support the economy, with inflation eroding the real value of incomes it is likely that households will struggle over the medium term. Record levels of employment and low interest rates are still supportive but incomes need to grow in real terms for this support to continue.                

Elsewhere, the Eurozone economy is continuing to show signs of a strong recovery. Financial markets are buoyant and share prices are being supported by results and dividend growth.  Analysts are waiting for the new French president, Emmanuel Macron, to announce plans to reform labour laws. Powerful unions have already indicated industrial unrest and strikes which could put the fragile economic recovery into reverse. Macron’s popularity is already falling at a record rate and his future legislative agenda could come under pressure if his employment plans fail.  In Germany, the legal issues surrounding the automotive industry continue to dominate the business community, this at a time of great technological change for carmakers, with the trend toward electric cars. German elections in September are not influencing market movements as a Merkel victory is seen as the most likely outcome in what has been a low key campaign.          

In the United States, tropical storm Harvey has forced the shutdown of almost a fifth of US oil refineries.  Gasoline prices at petrol stations have already risen strongly with the situation likely to last weeks if not months. Gasoline prices are closely monitored in the US as they tend to impact consumer sentiment.  Overall, the US economy continues to grow at healthy levels, which in turn is supporting the labour market. Equity markets have come under some pressure on the assumption that President Trump will fail to get his legislative agenda through, in particular his plans for taxation and business regulation. Technology related stocks have risen strongly this year as the pace of change quickens, disruptive technology is likely to be a major investment theme over the next few years.

Further afield, the Asia Pacific region continues to be dominated by the geopolitical backdrop.  Strong economic growth in the US and Europe is supporting business and trade activity and we see this continuing into the fourth quarter.

We remain cautiously optimistic and feel that our active investment strategy focussing on global diversification and assets with strong fundamental support, will help investors through the challenges ahead.         

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