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June 2016 Newsletter

Themes from the Month

“Brexit” risks were real, the “Leave” camp won a convincing victory by a margin of 51.9% to 48.1%

Scotland and Northern Ireland voted to remain in the EU.

Sterling slumped to 31 year lows against the US dollar as investors took fright at the government instability and likely short term shock to the UK economy.

PM David Cameron has announced his intention to step down by October 2016.

Easyjet issued a profit warning citing drops in consumer demand which will impact Q3 by a negative £28m and a more uncertain environment in H2.

Standard & Poor reduced the UK’s elite AAA credit rating to AA with a negative outlook post the Brexit vote.

UK ten year gilts responded stoically with the yield returning to 0.93% post the EU referendum vote, reflecting the sell off from UK equities.

UK equities saw significant declines in house builders, property companies, banks, insurers and retailers.

Stagecoach reported profit before tax of £187.4m and adjusted EPS up 3.7% to 27.7p. The co sold megabus Europe to FlixBus.

Premier Farnell the UK electronics distributor has agreed to be acquired for 165p per share in cash from Datwyler

Forthcoming UK Events

1 July Markit/ CIPS Consumer Confidence
4 July Construction PMI
5 July CIPS UK Services PMI
7 July Halifax House Price Index
8 July UK Balance of Trade
14 July BoE Interest Rate Decision/ MPC Meeting Minutes
15 July Construction Output
19 July Retail Price Index/PPI Output
20 July UK Unemployment Rate/ UK Average Rate
21 July UK Retail Sales
25 July BBA Mortgage Approvals/ CBI Industrial Trends
27 July UK GDP / CBI Business Optimism
29 July UK Mortgage Lending/BoE Consumer Credit

Performance of World Markets (30/6/2016)

North American Value Change +/-(1M)% +/-(1YR)%
DOW JONES (Close) 17,929.99 142.79 0.80 -0.09
S&P 500 (Close) 2,098.86 1.90 0.09 -0.13
NASDAQ (Close) 4,842.67 -105.39 -2.12 -4.68

Europe/UK Value Change +/-(1M)% +/-(1YR)%
UK 100 INDEX (Close) 6,504.33 273.54 4.39 -3.69
CAC 40 INDEX (Close) 4,236.45 -269.17 -6.47 -16.26
EUROSTOXX 50 (Close) 2,863.02 -200.46 -7.35 -16.39

Asia/Far East Value Change +/-(1M)% +/-(1YR)%
SHANGHAI COMPOSITE (Close) 2,929.61 12.99 0.44 -30.13
NIKKEI-225 (Close) 15,575.92 -1659.06 -9.62 -24.78
ASX 200 (Close) 5,378.60 -145.20 -2.70 -5.63
HANG SENG (Close) 20,794.37 -20.72 -0.10 -22.01

United Kingdom

The “Brexit” economic impact is hard to gauge in the short term but the Bank of England is suggesting further stimulus will be required over summer. The Bank could lower Base Rate to 0.25%, it could renew its bond purchase scheme increasing the current £375bn holding. The central bank seems keen to support the UK economy during this period of uncertainty. So far it appears unconcerned over plummeting sterling, now just $1.32.

The recent moves in the FTSE 100 suggest investors view the stimulus provided by cheaper sterling, declining interest rates and possibly a looser fiscal policy outweigh the uncertainty in the EU relationship. Investors are giving the UK government time to resolve “Brexit”. This positive backdrop should hold as long as not too many profit warnings arrive. So far only EasyJet has trimmed its forecasts.

China/Japan

Thousands of protestors are marching in Hong Kong on the 19 year anniversary of the handover from the UK to China in 1997. The disillusion with the Beijing government and calls for Hong Kong to be independent has grown post “Brexit”.
China’s manufacturing sector stalled in June with the official Purchasing Managers’ Index easing to 50 a four month low. This follows on from weaker industrial data in May. Nomura trimmed its forecast for China’s GDP growth to 6% for 2016.

Japan’s Government Pension Investment Fund (GPIF) has delayed the reporting of its result but confirmed it is on track to report a ¥5 trn ($49bn) shortfall for the year to end March 2016. The losses are due to high equity exposure at 50% which have suffered in the recent sell off.

Europe

The Italian government is considering creative ways to inject liquidity into the country’s banks. A liquidity support programme worth €150bn guaranteed by the Italian government is thought to be under consideration by the European Commission. Such a scenario does qualify as permissible state support under the provisions of “extraordinary crisis rules for state aid”. The problem remains the near €360bn in non performing loans in the Italian banking system which will require capital injections at some point.

The “Brexit” shock has been hard on the EU with leading indices sharply lower. The concern is the potential for further EU referendums. The issue exposed the fragility of the EU and the ease with which Article 50 can be triggered by national politicians. The EU took on trust PM David Cameron’s reassurances that “I am a winner” – now it seems the EU project will have to find a way to maintain the trading relationship with the UK, whilst preserving the benefits of being a Member State.

United States

The US Federal Reserve wriggled out of previous commentary to the effect that interest rates would rise in 2016. It wisely put off making a decision due to the UK’s EU vote whilst at the same time citing very weak May payroll data.

Microsoft’s decision to pay $26.2bn in cash for LinkedIn (7x revenues) is a struggle to justify using any objective business measures. LinkedIn adds strong social media exposure in the business niche but how does this add value for Microsoft shareholders? LinkedIn is heavily loss-making and lacks any real overlap with Microsoft’s product range.

Hershey Co, the chocolate bar maker rejected a $23bn approach from Mondelez International worth $107 per share in shares and cash. Hershey ended at $113.50 suggesting investors expect a revised higher offer from Mondelez.

US indices are underpinned with S&P 500 not far from record highs, regardless of the slow global economy.

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