Market Update – an independent market view as at 29th September 2016

The UK economy continues to confound the army of pessimists who predicted Armageddon if we voted to leave the EU.  The pound has dropped sharply, but this has corrected the previous overvaluation, helped export industries and stimulated a tourist boom.  The PMI (Purchasing Managers’ Index) fell sharply in July but more than recovered in August.  Unemployment fell by 174,000 in the three months to the end of July, the August balance of payments showed a sharp improvement and car sales showed strong year-on-year growth.  Despite the higher cost of imports, shop prices are down 1.9% yoy, helping consumer spending, but manufacturing input prices are up 7.6%, pointing to a likely rise in inflation in the months ahead.  Generally, the economy is doing well, and growth of around 1.7% should be achieved for the year.  A slowdown is to be expected next year as higher inflation eats into wages.  The Chancellor’s autumn statement on 23 November is anticipated to include a fiscal stimulus aimed at increasing infrastructure spending and encouraging house-building, with possibly a measure of tax reform.  All this should be positive for the equity market. 

Abroad, the US market continues to perform well, apparently unworried by the forthcoming presidential election, where both candidates are committed to curbing free trade and increasing federal expenditure.  The Chinese, Hong Kong, Indian and Brazilian markets are all in strong uptrends, most metal prices are recovering and oil is trading between $45 and $50 a barrel.  Europe remains the weakest area, with the Club Med countries mired in deflation, but there are signs of improving consumer demand and a modest decline in unemployment.  Italy’s banking crisis is still unresolved and the country faces a constitutional referendum next month.    Most European equity markets are however perking up, led by Germany’s DAX, providing hope for a better 2017 for the EU despite Brexit and internal tensions between Mediterranean, Northern and Eastern Europe.

 

The FTSE-100 index continues to trade between 6,650 and 6,950 and shocks allowing, we expect it to run up to around 7,200, predicted by the chart technical analysis ‘reverse head and shoulders’ pattern completed last month.  We expect the strong recovery in the important mining sector to continue, whilst the outlook for banks remains uncertain.  It is striking that the small-cap sector has been the strongest performer, moving into new high ground.  This reflects the underlying strength of up-and-coming companies, particularly, we believe, in the tech and industrial sectors, and more especially exporters.

With thanks to Balkerne Asset Management for their latest investment summary.