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July 2016 Newsletter

Themes from the Month

“Brexit” continues to dominate as evidence builds of a sharp slowdown in UK property and a far more cautious UK consumer.

Professor Stephen Hawking warned the UK government that the UK science sector is concerned over the loss of EU grants for research which have been vital for UK research and development jobs.

Sterling has stayed depressed against major currencies on speculation the Bank of England will cut Base Rate to 0.25% on 4th August and possibly introduce other measures to stimulate credit demand.

PM Theresa May said “Brexit means Brexit” suggesting no second referendum. The new Cabinet has abandoned the 2020 commitment to a balanced UK budget and signaled an end to austerity measures. The new PM wants the UK managed “in the interests of the many, not the privileged few”.

BP reported Q2 loss of $2.247bn after a further charge for the 2010 “Macondo” spill costing $5.23bn. BP net debt increased to $30.9bn from $24.8bn in Q2 2015.

Qatar Airways has increased its IAG stake to 20% taking advantage of the recent drop in the shares.

UK ten year gilts jumped to record levels, with the yield on 10 year gilts just 0.79%.

Premier Farnell the UK electronics distributor has agreed to be acquired for 185p per share. The offer from Avnet is 20p above the previous Datwyler offer.

Oil prices declined from over $50 to $41/bbl over July.

Anglo American reported underlying earnings of $698m and a plan to cut $1.6bn from costs in 2016.

Forthcoming UK Events

1 August Markit/ CIPS Manufacturing
2 August Construction PMI
4 August Bank of England Interest Rate Decision
5 August Halifax House Price Index
9 August UK Balance of Trade/ UK Industrial Production
12 August UK Construction Output
16 August Core Inflation Rate/ Retail Price Index
17 August UK Unemployment Rate/ UK Average Earnings Rate
18 August UK Retail Sales ex Fuel
19 August UK Public Sector Net Borrowing
26 August Nationwide Housing Prices/ GDP Q2
28 August UK Gfk Consumer Confidence
30 August UK BoE Consumer Credit

Performance of World Markets (29/7/2016)

North American Value Change +/-(1M)% +/-(1YR)%
DOW JONES (Close) 18,432.24 502.25 2.80  4.20
S&P 500 (Close) 2,173.60   74.74 3.56 3.32
NASDAQ (Close) 5,162.13            319.46 6.59 0.66
Europe/UK Value Change +/-(1M)% +/-(1YR)%
UK 100 INDEX (Close) 6,724.43 220.10 3.38    0.36
CAC 40 INDEX (Close) 4,439.81           203.36 4.80 -12.57
EUROSTOXX 50 (Close) 2,990.76           127.74 4.46 -16.83
Asia/Far East Value Change +/-(1M)% +/-(1YR)%
SHANGHAI COMPOSITE (Close) 2,953.39 23.78 0.81 -18.52
NIKKEI-225 (Close) 16,569.27            993.35 6.38 -19.59
ASX 200 (Close) 5,562.40 183.80 3.42 -2.41
HANG SENG (Close) 21,891.37 1097.00 5.27 -11.15

United Kingdom

The “Brexit” vote has led to a stampede into UK gilts with the 10 year gilt yield touching 0.79% a new record low. The mid cap index after initially lagging the blue chip index, has bounced to within 1% of its pre-vote level as investors have focused on three new positives.

Firstly it appears the new government will end the 2009-2016 austerity drive, hence the budget deficit in the short term is likely to remain at current levels. Secondly the UK/EU relationship could result in a “Brexit-lite” arrangement where in return for UK access to the EU, the UK continues to accept free movement of goods and people. Finally the UK could benefit from weaker sterling as more UK consumers stay at home and overseas profits become more valuable.

Growing concern over UK pensions since “Brexit” has led to the UK government confirming its “triple lock” guarantee. The drop in UK bond yields has lowered the discount rate to future liabilities and increased pension deficits.

IAG shares declined from 540p pre EU vote to just 400p reported strong net profits of €554m at halfway stage. IAG benefited from the Aer Lingus purchase in 2015.


Recently re-elected Japanese PM Shinzo Abe has announced a “bold” plan to revive the Japanese economy with a ¥28trn ($273bn) package of measures. It is Japan’s 26th attempt at fiscal stimulus since 1990.

Whilst Abe’s new plan led to a strong rebound in Tokyo equities, this is likely to prove short lived. This is largely due to recurring policy failures that do not address the economy’s structural problems, declining birthrate, a rapidly ageing population and weak productivity growth. A major problem created by these stimulus packages is the reliance on more debt at a time when the Japanese debt load, relative to GDP is excessive.

Recent Chinese data has shown stability. The Caixin manufacturing PMI (purchasing managers’ index) posted a rise to 50.6 suggesting on balance managers expected growth. Other official data shows China on course to meet an annual growth target of 6.5% -7%. China’s GDP growth was 6.7% during Q2 – the same as Q1. Other data, industrial production and retail sales have been broadly positive.


Italy’s third largest bank Banca Monte dei Paschi has failed EU stress tests. Under the test its common equity tier 1 (CET1) ratio falls to -2.4% in the adverse scenario. The Italian Treasury has said it will not require a further bailout. It plans to sell €5bn of new shares after the sale of a debt portfolio.

Under the same stress test, most lenders appeared robust, Deutsche Bank has 7.8% and Societe Generale 7.5% CET1 in the adverse scenario.

France became the first EU state to officially guarantee that UK passport holders could remain resident in France after the UK leaves the EU. The UK has shied away from making a similar commitment.

There is a realization that negotiations with the UK are likely to take far longer than the 2 years stipulated by Article 50. This is due to the complicated legal relationship between the UK and EU. EU officials compared the UK’s situation with the Greenland exit from the EEC which took three years to negotiate after its 1985 referendum and mainly covered fishing rights.

United States

US oil giant Chevron posted a Q2 loss of $1.5bn on revenues of $29.3bn (-27%) after posting a $2.8bn impairment charge. Chevron’s cash flow from operations sank 60% to $3.7bn underlining the pressures from oil in the $40-$50/bbl range.

Donald Trump has not precisely disclosed his liabilities. He has detailed loans of at least $335m a number that understates his true indebtedness as the disclosure only requires candidates to disclose the minimum levels of large loans exceeding $50m. Should “the Donald” win the White House he is likely to be the most indebted President in history. This raises the issue of the potential for conflicts of interest.

US data showed US home ownership continued to decline, slipping to 63% during Q2 2016. This low rate last seen in 1965, confirmed studies showing the Millennial generation are less willing to commit to mortgages. The decline in home ownership has been ongoing since US property prices peaked in 2006.

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