UK Equity Market Returns Q3 LTM
FTSE 100 (Largecap) - 0.7% 6.1%
FTSE 250 (Midcap) - 1.8% 4.9%
FTSE Smallcap (ex Inv. Trusts) - 2.1% 0.7%
- UK Economic data remains stable
- UK retail sales buoyant during summer months
- BoE raise interest rates
- Brexit weighs on UK equities
UK economic data is stable as Brexit saga rumbles on. The UK economy continues to perform ahead of economists’ gloomy expectations and is on track to hit +1.5% in 2018, however is growing below trend growth as business investment is delayed due to Brexit uncertainty. The manufacturing sector surprised markets to the upside, with the latest PMI arrived at 53.8 in September, compared to a previous 52.8 reading and ahead of expectations of 52.5. Companies credited the rate of growth to a solid increase in new orders from both domestic and export markets. The services sector PMI hit 53.9 in September in-line with expectations however below long-term PMI trend of 55.0 as political uncertainty weighed on corporate spending and confidence.
UK retail sales buoyant during summer months. Economic data showed a higher than expected increase in UK retail sales to +3.9% year-on-year driven by unusually warm weather, the World Cup, the Royal Wedding and resurgence in the UK consumer as wage growth surpassed inflation. Core inflation fell to +2.4% and wage growth hit +3.1% its fastest pace in 10 years and outstripping expectations of +2.6%. Whilst, unemployment held at 4%, a 40-year low, indicating the UK economy may be growing faster than official data suggests and growth may need to be revised soon.
The Bank of England (BoE) increase interest rates on the back of better-than-expected economic data. The BoE raised interest rates above the emergency level introduced after the global financial crisis. They raised rates on the back of strong data citing strong labour market, with unemployment rate lowest since mid-1970s, and higher wages. The rate was raised to 0.75% from 0.5% and remains highly accommodative to the economy. The Bank’s nine-member monetary policy committee voted unanimously for the increase, judging that the economy had bounced back from the effects of the “beast from the east” and the economic soft patch at the beginning of the year.
UK equities weighed down by fears of a no-deal Brexit. Interestingly, the inverse relationship between the Sterling and FTSE 100 has broken down recently as investors are less willing to blindly buy the FTSE 100 as Sterling weakens as the prospect of a “No-deal Brexit” increases. In our view, a relatively “Soft-Brexit” would support domestically orientated UK companies and likely cause a rally in Sterling and a faster pace of interest rate rises than is currently expected and therefore will push Gilt yields higher. The outlook for UK equities is uncertain however valuations of UK equities and in particular UK domestic companies are attractive and we believe a “No-deal Brexit” will be avoided. Any positive news on Brexit will bring international investors back to the UK, supporting UK assets. Over the quarter, the Oil & Gas sector, a dominant portion of the FTSE 100, performed well as crude oil prices rallied to $84 per barrel. Fears of a “No-deal Brexit” weighed on domestically orientated companies such as small and midcap companies, driving poor absolute return from the FTSE 250 and FTSE Small cap index falling by -1.8% and -2.1% respectively. With regards to corporate activity, Whitbread recommended to shareholders a bid from US drinks giant, Coca-Cola, for its Costa coffee chain, while John Laing Infrastructure Fund and Esure also had takeover approaches.
"Know what you own, and know why you own it." - Peter Lynch