Both the UK top 100 and all UK shares indices posted solid returns over the month with 3.09% and 3.12% respectively. With around three quarters of the UK top 100 companies constituents benefitting from US dollar earnings, it doesn’t come as a surprise to see that some of the impetus for these gains comes on the back of a 1.7% weakening in Sterling vs the US dollar over the period.
The UK PMI figure of 54.6, whilst ahead of the long term average of 51.5 and indicative of growth, signalled a second successive monthly slowdown in manufacturing, down from 55.7 in January. Despite this decline there has been an uptrend in business optimism, job creation, levels of household purchasing and a recovery in export orders. Nationwide reported that house prices rose 0.6% in February, up from 0.2% in January and ahead of forecasts, year on year this puts price rises at 4.5%. The market is expected to slowdown in 2017 with prices rising around 2%, supported by continued low borrowing costs and a lack of new builds causing supply shortages.
As we enter March the formalisation of ‘Brexit’ will become a reality as Prime Minister May looks to enact Article 50, the United Kingdom’s path to leave the European Union. With initial discussions taking up the next 24 months, further ‘fine tuning’ of agreement and legislation this will inevitability lead to periods of uncertainty which may well lead to increased market volatility over the same period. As it stands, UK companies are faring well, a weak currency is beneficial to our exporters and internationally focused UK listed companies and as such we remain slightly overweight in UK equities within our portfolios.
Continuing on from January, economic data has leaned towards the positive despite the first round of elections being imminent with the Netherland result on the 15th March. There was good upward revisions in the GDP growth rate, which outpaced the US in the final quarter of 2016. Positive business confidence carried through from previous quarters and employment data has improved on the whole. The rise of the popularist parties has obviously not gone away.
Despite encouraging data, the MSCI Europe ex UK index was 2.61% for the month of February in local currency. For UK investors, sterling strengthened slightly, which meant the MSCI Europe ex UK was up 2% in sterling terms. With the German election result (the last major political event of the year) on the 24th September, economists are likely to turn to consumption data. Monitoring the spending habits of the electorate will be a good indicator of renewed confidence or pessimism and with it the outlook for the European market.
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