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Executive Summary
November proved to be another challenging month for UK markets, with growing political and economic tensions generated by Brexit preventing participation in a global rally of risk assets. The Uk top 100 and UK 250 mid-cap ended November down 1.60% and 2.11% respectively, while AIM booked a 4.54% monthly loss.
At the sectoral level, losses were somewhat less widespread than in October. However, overall index performance was compromised by weak contributions from the usual ‘Brexit hedges’ (Oil & Gas and Mining) as concerns over the strength of the global economy gathered further.
UK economic data in November indicated a further slowdown in growth, and inflation data was also broadly weaker than expected. The Bank of England kept rates on hold as expected on 1 November, though attempts to talk up the prospects of future rate rises were largely unsuccessful. A sterling rally early in November was completely unwound by the month-end.
Given the prevailing uncertainties over the UK’s political and economic landscape, UK equity issuance fell sharply in November on both a month-on-month and year-on-year basis. The resulting deal count was very heavily concentrated in the Financial Services, Equity Investment Instrument, and Real Estate Investment and Services sectors.
UK Equity Markets
While November saw a broad recovery in global equity, UK risk assets largely failed to participate as concerns over the form of the UK’s imminent ‘Brexit’, and the economic consequences of such, continued to grow. The UK top 100 companies ended the month down by 1.60%, while the more domestically-exposed UK top 250 and AIM indices fell by 2.11% and 4.54% respectively.
At a sectoral level, losses were somewhat less widespread than in October, though the staple ‘Brexit hedges’ in the Oil & Gas (-5.60%) and Mining (-5.71%) sectors failed to offset rising domestic risk premia in the face of prospective oversupply. At time of writing, the market is anticipating a reduction in crude oil supply from the ‘OPEC Plus’ group of producers, to better balance markets.
As seen in October, the traditionally defensive Food & Beverages and Pharmaceuticals & Biotechnology sectors did offer some relief, managing monthly gains of 3.77% and 3.50% respectively, the latter supported by a positive earnings season. Additional support was lent by the Telecommunications sector which posted a stellar 13.61% gain on the month. While Telecomms performance has generally been poor and volatile during the course of 2018, it appears that investors are now taking a more positive stance on the financial restructuring of the index heavyweights.
Elsewhere, the Travel and Leisure sector managed to gain 1.07% on the month after a run of poor performance, despite ongoing concern over the fragility of UK domestic demand and the lingering impact of a hot summer. Similarly UK Banks put on 0.31% in November, with the sector passing the Bank of England’s 2018 stress test. Other more domestically-exposed sectors fared less well, with the Retail and Real Estate Investment Trust sectors falling by 4.19% and 5.35% respectively.
UK Economy
Data received in November continued to suggest a broad-based deceleration of UK economic growth following a strong rebound in the third quarter. Purchasing Managers Indices (PMIs) for Manufacturing and Services both disappointed, though Construction was a little firmer. UK households continue to be a source of fragility with consumer confidence and retail sales both significantly falling short of expectations. However the labour market continues to be resilient and provides something of a backstop to UK domestic demand.
As expected, Bank of England unanimously voted to keep rates on hold on 1 November, though its attempts to talk up the prospects of future rate rises proved largely unsuccessful. Overall, inflation data was softer in November, with consumer prices, house prices and wages all undershooting and producer prices being somewhat firmer than expected. The market continues to price a c. 40% probability of a quarter-point rise in rates by May 2019. A combination of weak inflation data, rate expectations and Brexit uncertainty contributed to a sterling rally in early November being completely unwound by the month-end.
Towards the end of the month, the Bank of England released the results of its annual ‘stress test’ of UK banks. As noted above, this broadly concluded that the system was sufficiently capitalised to weather a severe economic downturn. In addition, the government released a series of economic projections relating to a range of possible Brexit outcomes, which were seen to contribute to the weak performance of UK risk markets.
UK Equity Issuance
Given the profound uncertainties facing the UK amid the ongoing Brexit negotiations, UK equity issuance fell sharply again in November amounting to just £1488m. This represents a 54.41%% decline month-on–month and a 59.57% fall on November 2017. The deal count similarly fell to 24 from 35 in October and from the 48 booked in November 2017.
Equity issuance at the sectoral level was heavily concentrated, with Financial Services, Equity Investment Instrument, and Real Estate Investment and Services sectors accounting for 39.71%, 15.54% and 23.30% of the monthly total. In aggregate, only fifteen sectors were represented in November, down from eighteen the previous month and twenty-two on a year earlier.