Investment update – April 2015

Investment update - April 2015The FTSE 100 index of leading UK companies finished March at 6,773.04, falling by 173.62 points or 2.5% during the month. The index did however set a new record high during March, reaching as high as 7,065.10 points at one stage before slipping back.

European stock markets started the second quarter on a positive note, with strong manufacturing data in China and the Eurozone. Manufacturing activity in the Eurozone accelerated sharply during March, suggesting a fresh economic recovery.

Markit Economics published its Purchasing Managers Output Index (PMI) for the Eurozone at a level of 52.2 points in March, up from 51 in February. The initial estimate for March was 51.9 points. An index reading above 50 indicates expansion.

In China, the official Purchasing Managers Index (PMI) was announced at 50.1 for March, up from 49.9 in February and the first result since December 2014 to show expansion in manufacturing activity, above the crucial level of 50 points. This data in China follows fears about an economic slowdown and two interest rate cuts by China’s central bank.

In the US, stock markets have been more volatile recently as investors think about the outlook for US monetary policy, whether Greece will exit the Eurozone and recent big falls in the price of oil. Greece continue to hold talks with their creditors over a disputed list of reforms, although EU Council president Donald Tusk has said that a Greek bailout deal is still possible before the end of April.

Oil has rallied slightly in recent days as talks continue about Iran’s nuclear programme. Expectations about Iran pumping millions of barrels of oil into the market have been lowered as a result of negotiations in Switzerland dragging on. Iran is insisting that financial, oil and banking sanctions currently in place on their country are lifted. They produce around 2.8 million barrels of crude oil a day, according to Reuters, but Western sanctions on Iran limit output to 1 million barrels.

The Bank of England interest rate remains at 0.5%, with recent suggestions that it could be cut further to combat the threat of deflation quickly dismissed by senior monetary policy makers. Bank chief Mark Carney recently made it clear that the next move will be up, despite the official measure of price inflation falling to zero last month, and an expectation of deflation in the short-term. The Bank commented that it would be “extremely foolish” for them to “lean against” this current spell of low inflation by cutting interest rates further.

Deflation tends to be bad news for an economy, as consumers delay their purchases of goods and services in the expectation that prices will continue to fall and bargains can be found at a later date. If the Bank of England is confident any deflation will only be short-lived, then we believe that the next rise in interest rates is likely to take place in early 2016 at the earliest, and be modest in nature.

Price inflation in the UK reached a new record low of zero in March, as measured by the Consumer Prices Index (CPI). This is the first time inflation has been zero since records began in 1989, although the country has experienced periods of deflation in the past.

Prices for goods and services are being pushed lower by the falling oil price, a bit of a price war breaking out at the supermarkets, and falling prices for books, toys and games. Economists had expected a very modest inflation figure of 0.1% for the year to February, so the announcement of ‘noflation’ took the markets slightly by surprise.

John Hawksworth, chief economist at PwC, has been quoted in response to these inflation figures as saying: “We think this would represent a good form of deflation in which lower global food and energy prices provide a much needed boost to household real income levels, helping to end the real wage squeeze of the past six years,”

Annual house price growth in the UK fell to 5.1% in March, according to the latest index figures from Nationwide Building Society. It was 5.7% in February. Prices rose by just 0.1% month-on-month and the average value of a property is now £189,454. House prices are now around 2% higher than their pre-financial crisis levels.

Robert Gardner, Nationwide’s chief economist, commented “Economic conditions have remained supportive, with labour market conditions continuing to improve and mortgage interest rates close to all-time lows,”

The benchmark 10 year UK Gilt yield currently stands at 1.56%, falling during March. £1 buys $1.47830 or € 1.37260. The Forex Gold Index is $1,187.00/oz and the Silver Index is $16.60/oz.

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