The Monthly - July 2017

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Well well, another month passes complete with US political intrigue, a broad array of macro-economic data releases and continuing uncertainty regarding Brexit negotiations.

Let’s quickly review market moves and take things from there. In broad terms the FTSE 100 was largely unchanged over the course of July, starting as it did around the 7,375 level and closing out at 7,370. As ever there was a reasonable degree of volatility intra-month with a high of just under 7500 being achieved around mid-month which coincided with a decline in trading volumes- this is to be expected during the summer doldrums.

However the summer trading doldrums do not extend to politics- in the US Trump sacked his Communications Officer after a mere 10 days in the job and also seems hell bent on antagonising both the Chinese and Russians. We postulated last month that this could conceivably be an attempt to distance himself from the ongoing charge that the Russians influenced the outcome of the US Presidential election (in his favour), but the recent expulsion of diplomatic staff from Russia makes this notion seem less likely.

Further afield the monthly release of macro-economic data implied that Chinese raw material consumption could support higher commodity prices, and UK listed miners tended to be buoyant albeit concerns still linger around the wider issue of the Chinese shadow banking situation. Generally speaking the improvement in economic data has continued, albeit not without the occasional blip: UK 2nd Quarter GDP growth came in at an uninspiring 0.3% which doesn’t compare too favourably with the equivalent US reading of 0.6% albeit this appears consistent with current sentiment.

From a stock specific perspective the US FDA announced measures to reduce nicotine levels to non-addictive levels in certain tobacco products- this has had a negative impact on both British American Tobacco and Imperial Brands although we see this reaction as being somewhat overdone and are prepared to hold our positions at this stage. The outlook is not as positive as it previously has been for the companies in question, although we note the strength of the tobacco lobby in the US and that the measures in question are perhaps less stringent than they initially appear.

Closer to home the early stages of the Brexit negotiations do not appear to be going particularly well. Depending on one’s point of view this could be tactical- both parties are circling while trying to pinpoint weakness in the other, or just disappointing in that seemingly the EU negotiation team hold all the cards. In this sense it is perhaps worth reminding ourselves that the Article 50 imposed 2 year time frame is pretty tight given that unanimous approval for any agreement is required from member states. This last factor, as well as what could be perceived as an undue level of intransigence (demands for the “divorce bill” of c. £60bn to be paid prior to the start of negotiations) makes me think that Hard Brexit is perhaps more likely than is currently considered. The Government have reiterated that “no deal is better than a bad deal” and one wonders if at some stage this assertion will be tested.

Clearly such an outcome would be likely to have a profound impact on markets, particularly in the UK where uncertainty would escalate and sterling would be likely to weaken, and I would encourage readers to familiarise themselves with our current asset allocation: we have recently reduced our weighting to UK equity and increased overseas investment while within the UK we have tended to boost the allocation to companies which benefit from overseas earnings. Transactional volumes in portfolios have therefore remained elevated through July as these alterations are implemented.