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Investment Market Commentary - July 2017

 

Over the past month, the biggest influence on domestic financial markets has been the UK General Election.  The shock result of a hung parliament has thrown into doubt a number of key issues facing the country and it is possible that another election could be called should Theresa May be forced out as Prime Minister, although this looks unlikely at the current time.  The Queens speech at the opening of Parliament was thin on detail and the legislative agenda indicates five years of muddling through rather than any major changes to business and economic policy.

BREXIT negotiations have now started and it will be months before there is any clarity on the likely outcome and implications for both economies. Financial markets and business leaders are hoping that a weakened Conservative Government will be forced to take a softer line with the EU resulting in a deal that preserves as many benefits as possible.

Domestic financial markets continue to trade solidly, although the steep rises seen over the last year are starting to flatten out.  Recent weakness in the FTSE 100 Index has been caused by falling oil prices dragging down the share prices of large energy companies.  Consumer related stocks have also come under some pressure on fears that falling real wages are starting to impact on consumer spending. Until now, consumers have continued to take on more debt to fuel consumption but a combination of already high debt levels and fears over the next move in interest rates are starting to have an effect.

Recent economic data is pointing to a domestic economy where growth is slowing. However, record levels of employment and low interest rates are supportive.  Meanwhile, falling mortgage approvals are starting to signal that house prices are nearing a peak and recent evidence suggests that prices are starting to fall in some areas.               

Elsewhere, the Eurozone economy is continuing to show signs of a strong recovery. Financial markets are now looking for indications that the European Central bank are going to normalise monetary policy, reign in quantitative easing and reduce the large bond buying operation. This could be a sign that European interest rates are ready to move upwards. A recent EU trade deal with Japan also looks positive from a longer term perspective.  The next major event in Europe will be the German elections in the early Autumn, early indications suggest that Angela Merkel will win another term in office.      

In the United States, the important service sector expanded at a significant rate in June and this would indicate that broader economic growth will be relatively strong.   Inventories, an indicator of business confidence also rose as did employment. In equity markets, technology stocks have come under some pressure recently on fears that valuations have got a little ahead of themselves, although the long term outlook still looks positive.

Further afield, the Asia Pacific region will be dominated by the geopolitical backdrop.  North Korea continues to test missiles and develop a nuclear capability, causing tensions with the US and its closer neighbours. It is hoped that a diplomatic solution can be found, although at this time that possibility looks a long way off. Economic growth in China continues to underpin confidence in the region and boost business activity.

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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