UK Highlights

 The main points from the September Economic Review by the Office of National Statistics are provided below:

Post referendum data

Our estimates for Retail Sales, Consumer Price Index (CPI), Producer Price Index (PPI), vacancies and experimental claimant count statistics covering data for July generally follow existing trends. For example, while CPI remained little changed in July and is low by historic standards, input and output prices for UK manufacturers continued to rise in the year to July 2016. The changes in PPI can be partly attributed to changing oil and petroleum prices which, alongside the sharp depreciation in sterling immediately after the EU referendum result, may also have had an impact on input producer prices.

GDP

The second estimate of gross domestic product (GDP) for Quarter 2 (April to June) 2016 – a period that almost entirely covers the period immediately prior to the EU referendum – indicated that the UK economy grew by 0.6%, unchanged from the preliminary estimate.

Following recent trends, household consumption remains the largest contributor to quarter on same quarter a year earlier GDP growth – adding 1.9 percentage points over this period.

FDI

The share of UK-owned foreign direct investment (FDI) assets held in the EU has been falling since 2011 and the rate of return on direct investments in the EU and all other overseas regions has also been falling over the same time period. In contrast, the value of the stock of overseas investment in the UK has been increasing for all overseas regions, with the EU also seeing an increase in the rate of return on their FDI holdings in the UK.

Labour market

The unemployment-to-vacancy ratio for April to June 2016 dipped to its lowest level since November to January 2005. This potentially reflects a tightening of the labour market, according to this measure.

Source: ONS

Brexit

As a backdrop to the challenge of exiting the EU, some clarity was required as to how and when. We have received this recently from Prime Minister Theresa May’s to that the UK will trigger Article 50 of the Lisbon Treaty before March 2017.

The new chancellor Philip Hammond has said he will prioritise spending on new homes and transport rather than following his predecessor George Osborne’s aim to balance the books by 2020. He told the Conservative conference the deficit was still too large and would need to be tackled “in due course”. But he said the Brexit vote may cause “turbulence” and business confidence would be on a “bit of a rollercoaster”. It was “common sense” to invest to support growth and jobs. In his conference speech, Mr Hammond said Mr Osborne’s deficit reduction policies “were the right ones for that time” but that times had changed since the vote to leave the EU. “When times change, we must change with them,” he said. “So we will no longer target a surplus at the end of this Parliament. But make no mistake the task of fiscal consolidation must continue. “The British people elected us on a promise to restore fiscal discipline. And that is exactly what we are going to do. But we will do it in a pragmatic way that reflects the new circumstances we face.”

While the markets had “calmed” since the Brexit vote, he said it had caused uncertainty for business and the government had a duty to act to protect the economy.

We await the Autumn statement with intrigue and much interest as it is clear that we will steer a different course than the previous one under the former cabinet.

Investment Markets – Update

Turning to Investment Markets, August and September has continued to remain positive, with the exception of bond sectors posting negative returns in September.

All Unit Trust and OEIC sectors posted significant positive returns, following the EU Referendum Vote to leave. These gains have been largely driven by the fall in Sterling. We continue to expect increased volatility across markets and in light of the announcements made by Theresa May and Philip Hammond in formalising our exit from the EU, this has appeared to stimulated markets further in the short-term.

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.

Sector 1m 3m 6m 1yr Ann. 3yr Ann. 5yr Ann. 10yr
UT Japan Retail TR in GB 3.68 12.65 21.39 32.75 11.21 11.62 4.52
UT Asia Pacific Excluding Japan Retail TR in GB 2.73 13.70 22.54 37.60 10.75 10.69 9.80
UT Global Emerging Markets Retail TR in GB 2.16 12.88 22.15 37.44 6.30 6.39 6.83
UT UK Smaller Companies Retail TR in GB 1.78 14.87 6.35 7.45 8.86 14.43 8.05
UT European Smaller Companies Retail TR in GB 1.72 11.84 12.40 24.77 13.23 16.86 9.50
UT Global Bonds Retail TR in GB 0.68 3.89 8.83 14.30 5.13 4.05 5.12
UT UK Index
Linked Gilts Retail TR in GB
0.61 11.25 21.30 24.35 13.44 9.83 8.18
UT North American Smaller Companies Retail TR in GB 0.56 11.60 20.89 30.80 12.99 17.10 10.49
UT UK All Companies Retail TR in GB 0.43 9.98 8.65 11.66 6.40 11.51 5.47
UT North America Retail TR in GB 0.40 8.98 16.54 31.54 15.87 17.26 9.27
UT Europe Excluding UK Retail TR in GB 0.38 8.86 10.73 17.86 8.43 13.07 5.87
UT Property Retail TR in GB 0.25 2.56 3.62 8.48 7.90 7.92 1.26
UT Targeted Absolute Return Retail TR in GB 0.10 1.48 0.88 0.65 2.58 3.02 3.72
UT Sterling High Yield Retail TR in GB -0.25 4.49 6.75 8.42 3.86 7.38 5.34
UT Sterling Corporate Bond Retail TR in GB -0.69 5.93 9.10 11.48 6.58 7.03 4.52
UT UK Gilts Retail TR in GB -1.75 4.24 10.29 13.95 8.46 5.71 5.54

Source: FE Analytics – % growth to last month end 30.09.2016

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