2016 May Economic Review
UK Highlights

• GDP growth 0.40% Quarter on Quarter growth 2016 Q1
• CPI inflation has been recorded at 0.50% in March 2016
• For December 2015 to February 2016, 74.1% of people aged from 16 to 64 were in work, the highest employment rate since comparable records began in 1971.
• The unemployment rate for December 2015 to February 2016 was 5.1% lower than a year earlier (5.6%).
GDP quarter on quarter growth

CPI Consumer Prices Index

Unemployment Rate

Investment Markets – Update

In April, a mixed result across Unit Trust and OEIC sectors, with both positive and negative results. This continues the theme of increased volatility across markets since the start of 2016.

Below we provide a table of the major sectors that we allocate to when constructing our client portfolios. The data has been sorted over 1 month in order of best to worst returns. We have shown returns on an annualised basis for 1 year and above. We also include the quarterly Economy and Market review from our chosen third party providers E-Value.

Sector 1m 3m 6m 1yr Ann. 3yr Ann. 5yr Ann. 10yr
UT Sterling High Yield Retail TR in GB 2.17 4.87 1.44 -0.49 2.30 4.20 5.09
UT Japan Retail TR in GB 0.98 3.32 1.54 -1.16 4.31 8.00 1.12
UT North American Smaller Companies Retail TR in GB 0.92 11.62 4.42 -1.26 9.41 8.77 7.33
UT UK All Companies Retail TR in GB 0.74 4.44 -0.50 -3.55 5.72 6.26 4.58
UT UK Smaller Companies Retail TR in GB 0.57 3.46 0.14 5.37 11.33 9.91 7.12
UT Sterling Corporate Bond Retail TR in GB 0.52 2.09 2.69 0.28 2.55 5.04 3.91
UT Global Bonds Retail TR in GB 0.13 3.05 5.31 3.07 0.32 2.63 4.22
UT Europe Excluding UK Retail TR in GB 0.08 4.63 2.56 -0.83 6.78 5.15 4.55
UT Property Retail TR in GB 0.08 3.33 2.48 3.99 6.39 5.65 1.60
UT Targeted Absolute Return Retail TR in GB -0.17 -0.20 -0.79 -0.66 2.42 2.26 3.70
UT Global Emerging Markets Retail TR in GB -0.22 12.11 5.70 -10.93 -2.98 -2.09 3.76
UT North America Retail TR in GB -0.29 7.74 3.95 2.83 11.39 11.12 7.16
UT UK Gilts Retail TR in GB -1.21 -0.08 3.40 2.71 2.82 5.00 4.68
UT Asia Pacific Excluding Japan Retail TR in GB -1.41 7.85 4.22 -10.22 0.44 1.89 6.89
UT European Smaller Companies Retail TR in GB -1.45 4.54 6.08 5.94 11.75 8.11 7.48
UT UK Index
Linked Gilts Retail TR in GB -2.25 -1.65 1.26 -0.16 2.98 6.63 6.46

Source: FE Analytics – % growth to last month end 30.04.2016

Economy & Markets

The year and the quarter started with oil and share prices collapsing while bond prices soared. Oil and share prices have since recovered but bond yields remain very low. This is not the prospect contemplated a month earlier when the US Federal Reserve raised interest rates for the first time since the last change more than 7 years ago. Not long ago, there was talk of the Bank of England raising interest rates before the Fed but over the quarter the wait grew from months to years.
The size of that move may be more to do with a finely-balanced situation than with a big movement in the real economy. Even so the situation is not rosy and the UK economy faces many obstacles: anemic growth abroad, slowing economic growth and resolutely low wage growth at home, and the uncertainty and possible disruption of Brexit.

Prospects

Low rates and steady equities mean overall expectations are noticeably lower. The one positive note is in emerging markets. Forecasts have risen and prospects with them. The rise is not strong and there are large and obvious risks in some significant markets; Brazil, for example, faces severe
challenges. Even so, the outlook for emerging markets is more positive than everything else.
After yet another good quarter for bonds, a word about their prospects may be in order. Interest rates in the UK are at unprecedented lows. A natural conclusion widely drawn is that the next move will be up. Less well-founded but almost as common has been the expectation that rates will make their move soon. That certainly could happen but developments in Japan and
Germany, where interest rates on government bonds have gone negative on terms as long as 10 years, suggest that there are other possibilities and perhaps more importantly that any move need not be quick or soon. Lower rates do make our projections for fixed income returns lower and our projections show upward moves more likely than down but they do not suggest that bonds are a one-way bet by any means. In Japan, where rates have been very low for a long time and the government has been actively trying to produce inflation, making that bet has such a poor track record that it is dubbed the ‘Widowmaker’.

Asset allocations

Even distribution of bad news means that the impact of the changed outlook on allocations is not as marked as it is on the level of returns. The main effect has been to reduce bond allocations a little and to increase emerging market allocations where allowed. Since emerging market allocations have been depressed recently, the latter change is quite marked in some areas but the absolute levels are not dramatic.

Source: E-Value April 2016

Opinions & Insights

Making retirement more comfortable

Active members of defined benefit or final salary schemes are sadly a dying breed but for those fortunate enough to still be building pension benefits in this way there are a number of options to fund further benefit accrual. Read more →

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