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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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Markets spent most of last week watching the White House soap opera unfold, ending with the departure of chief strategist Steve Bannon. The optimistic spin being put on this is that it will allow Donald Trump and what is left of his team to focus on tax reform, an issue that is obviously of great importance to investors. Firstly though, the administration needs to prove it can work effectively with Congress and get the debt ceiling raised by early October otherwise the ‘full faith and credit’ of the United States will be tested. Meanwhile, in the UK, the government published a number of position papers on Brexit as hopefully a way of pushing the negotiations with the EU forward; they were a reminder also of how fiendishly complicated some of the issues are likely to prove which will almost inevitably mean a long transition period is required. This week, investors will be looking forward to the Jackson Hole conference where Janet Yellen and Mario Draghi are due to speak. This annual summit occasionally produces market-moving speeches from central bankers and there is plenty for them to talk about in terms of low inflation, quantitative easing and currency markets. Markets are understandably aware that low interest rates and QE have been a big driver of the strong returns that have been enjoyed in recent years and are obviously sensitive to any sign that this support is about to end. We would expect Draghi and Yellen to continue to sound pretty dovish though as there remains a real lack of significant inflation pressures despite low unemployment rates and solid economic growth.
Tim Childe, head of Quilter Cheviot’s Jersey office and head of international, has been listed as one of Citywealth’s top 20 men in private wealth management for 2017. With over 30 years’ experience in the investment management industry, the last 27 at Quilter Cheviot, Tim is highly experienced in managing investment portfolios for charities, family trusts and private clients around the world. Tim said, “I really enjoy dealing with clients and helping them to meet their financial aspirations, and so to be nominated for inclusion by my peers was a great honour in itself. I am thrilled to have my efforts recognised by being recommended by Citywealth’s leaders list.” Selections are made by the editors of Citywealth based on ten years of industry experience and market research within the wealth industry, using criteria including communications skills, interpersonal skills and technical expertise.
Last week’s economic news was understandably put in to the shade by the bellicose rhetoric from the US and North Korea although the tension seems to have eased a little over the weekend. On the data front, though, it was the same old story with US inflation as headline CPI came in weaker than expected at 1.7% and core CPI was up only 0.1% on the month. Markets are now only pricing in a 40% chance of another Fed rate hike this year even if they will still start winding down their balance sheet from next month. The news out of Asia was mixed. In Japan, the economy apparently grew by an annualized 4% in the second quarter, boosted by business investment and consumer spending although there is always the chance that the first estimate will be revised lower. Data out of China, including retail sales, exports and industrial production, was weaker than expected. Looking ahead this week, we will get an update on the state of the UK economy with retail sales, the unemployment rate and inflation numbers all due to be released. Inflation is likely to have picked up a bit in July but we appear to be reaching the peak. US retail sales are also out.