INVESTMENT REVIEW – December 2017
Markets in the month of November were more mixed, with gains in the US and Japan offset by
declines in the UK and the rest of Europe. There has been positive news on economic growth and on
corporate earnings, with little impact from politics and geopolitics in spite of the best efforts of some,
including Kim Jong-un in Korea.
In the UK the Bank of England’s Monetary Policy Committee as expected agreed at the beginning of
the month to increase interest rates by 25 basis points, thus reversing the cut in June 2016, while the
Governor Mark Carney indicated that future rate rises would be gradual and limited. The Chancellor
of the Exchequer seemed focussed on the housing market in his second Budget which was also
notable for the revision to the government’s growth forecasts for the economy, which were cut from
2% to 1.5% for the current year and to a range of 1.3% to 1.6% in the years to 2021. While this reflects a
degree of resilience it does also mean that the budget deficit will take longer to correct, which will be
one factor that will impact Sterling, as will developments during the Brexit negotiations, in which not
surprisingly the Irish question is proving problematic. The prospect of seeing Jeremy Corbyn and
John McDonnell in office has been disconcerting, although the shadow chancellor has apparently
been looking to build bridges and there is no certainty that there would be another election before
2022, that Labour would win and that they would be able to carry out their policies. Mr Corbyn’s
anti-City rhetoric will keep some pressure on the financial services sector, which has already looked
to re-locate in part following the EU referendum.
On the Continent Angela Merkel’s CDU party and its Bavarian partner CSU failed in their initial
efforts to negotiate a coalition. There will be fresh efforts to work with the Social Democrats and there
is an increased likelihood of either a minority government or of a repeat election, each of which
would have no precedent in post-war Germany. The secessionist pressures in Catalonia have faded
although a regional election later in December might yet bring further tension to the region, which
accounts for about a fifth of the overall Spanish economy and which has in the short-term been
impacted by a dip in tourist numbers (which were down by 5% in October) and the move by some
2,500 companies to re-locate their legal headquarters. Politics aside, the Eurozone economy has been
reassuringly robust and the European Central Bank supportive.
In the US, Jerome Powell was duly confirmed as the new chairman of the Federal Reserve and at a
hearing to confirm his appointment he said that he would provide continuity and would maintain the
current policy of raising interest rates gradually. President Trump’s administration is moving closer
to agreeing its proposed tax reforms, which should provide a boost to an economy that has also been
increasingly robust according to the latest data.
In China it will be interesting to see what developments if any will now follow President Xi Jinping’s
moves to cement his position at the Communist party’s national congress. The economy has looked
suitably strong: online sales on the two largest e-commerce platforms on ‘Singles Day’ were $44bn,
which makes Black Friday in the US look modest, and even traditional retail outlets are still growing
sales at about 10%. In Japan the prime minister Shinzo Abe and the Bank of Japan are proceeding
with their policies to boost growth and inflation, which would support a stock market that has been
strong even if individual companies are still confessing to a range of shortcomings. The region has
still to deal with North Korea which launched an even more powerful missile, although that was it
seems disregarded by most. The Indian economy looks to have improved, with expansion at a rate of
6.3% in the third quarter reversing a trend of five quarters of declining growth rates which reflected
the impact of the change to the notes in circulation.
The FTSE 100 index fell back by 2.2% over November to close at a level of 7,327 while the FTSE 250
Index and the FTSE SmallCap Index each declined if a little less at -1.4% and -1.1% respectively. For
the combined FTSE All-Share the return was -2% in the month, while the AIM All-Share dipped by
1.2%. There were no changes in the Budget that impacted the appeal of certain AIM shares for
inheritance tax planning.
In the US the S&P 500 made a further gain of 2.8% over the month, the concentrated Dow Jones
Industrial was up by 3.8% and the technology-oriented NASDAQ rose by less at 2.2%, in part as such
shares became more volatile towards the end of the month. The Russell 2000 index of smaller
companies rose by 2.8%. In Europe the EURO STOXX 50 also fell by 2.2% while the Euromoney index
of smaller companies was a little more resilient at -1.8%. In Japan the Nikkei 225 rose by a further
3.2% in the month reflecting continued confidence in the moves to secure higher growth and
inflation. The MSCI Emerging Markets index in US$ terms managed only a small gain of 0.2% in the
month, with only Mexico of the large markets doing well, while the MSCI Frontier markets index rose
by 1.1% with the Ho Chi Minh stock index in Vietnam doing particularly well.
In the bond markets the UK 10-year gilt yield was unchanged at 1.33% and the total return for the
FTSE Gilts All Stocks index was 0.3% in November. The yield on German 10-year bunds was a little
higher at 0.37% as was that on US 10-year Treasuries at 2.41%.
Sterling was mixed over the month, helped by the move in interest rates and the prospect of some
agreement on the Brexit negotiations; it rose by 1.8% against the US dollar to close at a rate of $1.35:£
but did not match a stronger euro, dipping by 0.4% if still at €1.14:£. The euro rose by 2.2% against the
US$ in the month.
The price of Brent oil continued to increase if with a more modest rise of 2.7% over the month to $63
per barrel; it was indicative that Royal Dutch Shell announced in the month its intention to resume
paying dividends only in cash and not in scrip, as it has benefitted from the recovery in the oil price
and from the proceeds of a series of disposals. The price of gold rose by a modest 0.3% to $1275 per
troy ounce. Other metals were mixed, with the bellwether copper down and with palladium making
further gains. Agricultural commodities were mixed and little changed. The Vix index of volatility in
the US market was up in the month in a rising market although still down by about a fifth over 2017.
Markets have maintained some momentum if with less conviction. We continue to appreciate the
positive factors as well as being conscious of a range of risks and mindful of the potential for a
correction, which might be short-lived but would provide an opportunity, as would the continued
divergence in returns in markets that have been led by a few favoured shares.
Julian Cooke – Director 1st December 2017
Vintage Asset Management
7a Wyndham Place, London W1H 1PN
Tel.: 020 7989 3110
Vintage Asset Management Limited is authorised and regulated by the Financial Conduct Authority,
IMPORTANT NOTICE: Any forecasts, figures, opinions or investment techniques and strategies set
out, unless otherwise stated, are Vintage Asset Management’s own. They are considered to be
accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any
error or omission is accepted. They may be subject to change without reference or notification to you.
The views contained herein are not to be taken as an advice or recommendation to buy or sell any
investment and the material should not be relied upon as containing sufficient information to support
an investment decision. It should be noted that the value of investments and the income from them
may fluctuate and investors may not get back the full amount invested.
INVESTMENT REVIEW – December 2017