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Weekly comment: 31.07.2017

Economic Overview, Richard Carter

Data out on Friday revealed that the US economy bounced back in Q2 with GDP growth of 2.6% annualized, driven largely by consumer spending. Although this is welcome, it was actually a bit less than the market was expecting and came after a disappointing Q1, while hopes of any White House-driven boost to growth seem increasingly remote given the dysfunctional state of the Trump administration. Meanwhile, the news in Europe continues to be comparatively upbeat with decent growth numbers out of Spain and France as well as higher than expected German inflation. This is all very supportive for the Euro which hit a 2.5 year high against the US Dollar last week and argues for a more hawkish bias from the ECB.

The news out of the UK remained rather downbeat against a backdrop of Cabinet in-fighting over Brexit. The economy grew by a fairly sluggish 0.3% in the 2nd quarter, while consumer confidence fell back to post-referendum levels which is hardly surprising given all the grave headlines about a consumer debt bubble. This all suggests that the Bank of England will leave interest rates unchanged at their meeting on Thursday even though one or two economists are still predicting an interest rate hike. We will also receive US nonfarm payrolls and the ISM this week.

Market Overview, Alan McIntosh

The phrase “a good day to bury bad news” has become notorious and associated with political spin, although just like “crisis what crisis?”, no-one actually said it. Last Thursday was a record day for UK company results, with thirty corporates reporting. Among those announcing was Astra Zeneca who presented a respectable set of Q2 numbers. Unfortunately accompanying the figures was news that their potential cancer drug had failed an important trial. The market reaction was swift and brutal, knocking 15% off the Astra price, although the shares have since recovered some of the initial losses.  Even the plethora of other company news on the day was insufficient to draw attention away from this disappointment, and as a result, investors will remember AstraZeneca and not the twenty-nine others who reported on the day.

Further bad news for  equity markets came via the tobacco sector on Friday. US Food and Drug Association commissioner Dr. Scott Gottlieb announced a new plan for tobacco regulation with the aim of minimising the addictiveness of cigarettes through lowering allowable nicotine levels. Although no timescale was given for this proposal, the negative share price reaction of the major tobacco stocks was immediate. In this case, unlike AstraZeneca, whose share price has risen in the two trading days since the cancer drug warning, the tobacco company share prices have continued to slide today (Monday), albeit less aggressively. There has yet to be a response from the industry and in the absence of further detail about the proposed legislation, the sector may remain rudderless for a while.

Structural and /or regulatory threats to traditional industrial sectors (think retailing, motor vehicles, among others) are not going away. This presents a significant challenge for companies trying to reinvest capital at higher returns. There is plenty of capital around, but fewer attractive homes for it. With this in mind, active investment remains the best way to navigate these ever uncertain waters (IMHO).

This commentary has been prepared for information purposes only and is not a solicitation or an offer to buy or sell any security. It does not purport to be a complete description of our investment policy, markets or any securities referred to in the material. The information on which the commentary is based is deemed to be reliable, but we have not independently verified such information and we do not guarantee its accuracy or completeness. All expressions of opinion are subject to change without notice. Investors should remember that the value of investments, and the income from them, can go down as well as up and that past performance is no guarantee of future return. Quilter Cheviot is the trading name of Quilter Cheviot Limited, a private limited company registered in England with number 01923571, registered office at One Kingsway, London, WC2B 6AN. Quilter Cheviot has established an office in Dublin, Ireland with number 904906, is a member of the London Stock Exchange, is authorised and regulated by the UK Financial Conduct Authority, is regulated by the Central Bank of Ireland for conduct of business rules, under the Financial Services (Jersey) Law 1998 by the Jersey Financial Services Commission for the conduct of investment business in Jersey and by the Guernsey Financial Services Commission under the Protection of Investors (Bailiwick of Guernsey) Law, 1987 to carry on investment business in the Bailiwick of Guernsey. Accordingly, in some respects the regulatory system that applies will be different from that of the United Kingdom.

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