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UK Weekly Commentary

BlackRock |15-Jan-2018

UK weekly commentary from BlackRock covering week highlights, what we’re thinking about the markets and what your clients may be asking this week.

Week past - highlights Week ahead – highlights


Week past

3 January - 10 January

The year started positively as the US Institute of Supply Management’s manufacturing index beat expectations, rising close to a 13-year high. It was further evidence of a stronger economy and initially exerted some pressure on the Federal Reserve to increase the rate of its tightening cycle.1

However, it was followed by underwhelming payroll data, with non-farm payrolls rising by 148,000 in December, some way short of expectations. The jobless rate remained at 17-year low of 4.1% for the third successive month.2

Global stock markets continued to hit new highs, in spite of increasingly concerns on valuations. The Dow, S&P 500 and Nasdaq all set record closing highs during the week.3

In Europe, the introduction of the vast, wide-reaching MiFID II proceeded with relatively few hitches. Markets operated effectively, defying concerns about the robustness of computer systems.4

Purchasing managers’ indices (PMIs) for the major Eurozone economies showed growth momentum strengthening.5

Economic data in Japan was sufficiently strong to push the Bank of Japan into trimming its purchases of 10-to-25 year debt by ¥10bn to ¥190bn under the country’s quantitative easing programme. This was the first reduction since December 2016.6

With an increasing focus on the implications of a ‘no deal’ Brexit, the UK trade deficit narrowed by £2.1bn in the three months to November last year, according to the Office for National Statistics (ONS).7

UK industrial PMI figures for November showed real strength in manufacturing, but this wasn’t reflected in November’s industrial production figures.8 At the same time, construction activity painted a bleak picture. It fell at its fastest pace in five years in the three months to November, with the finger pointed at political and economic uncertainty.9

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index.

1Kristina Cahill, Institute for Supply Management, January 2018
2Global stocks shrug off underwhelming US data, Financial Times, January 2018
3Dow breaches 25,000 as world stock rally continues, Financial Times, January 2018
4Europe begins countdown to Mifid II, Financial Times, January 2018
5Rahul Karunakar, Reuters, January 2018
6US 10-year Treasury yield above 2.5% after BoJ move, Financial Times, January 2018
7Caitlin Morrison, City AM, January 2018
8Fast Europe Open: Norway inflation, UK trade data, Financial Times, January 2018
9UK construction activity contracts at fastest rate in 5 years, Financial Times, January 2018

Week ahead

11 January - 18 January

US consumer prices and inflation statistics will give an indication of the strength of the US economy and whether another interest rate rise is likely. Payrolls and other data had suggested some weakness towards the end of 2017. In November, the headline inflation rate sat at 2.2%, with prices rising by 0.4% month on month. Oil prices have risen since then, but core inflation appears under control.10

In the UK, the Office for National Statistics releases its quarterly ‘profitability of UK companies’ bulletin. This looks at private non-financial corporations. The last quarter showed a slowdown and the statistics are likely to be taken as a benchmark for the UK economy.11

UK input prices – which measure the price of materials and fuels bought by UK manufacturers for processing – will show the pressure on UK plc. Prices are already up 7.3% year on year and are a tough headwind for the profitability of some UK companies.12

Eurozone inflation is expected to continue at benign levels, but the European Central Bank will be watching for any signs that the recent strong economic performance is making its way into higher prices. 12

China GDP will be important, less for the actual figure – which is largely a foregone conclusions – but for any accompanying comments.12

Past performance is not a reliable indicator of current or future results.

10Yen Nee Lee, CNBC, January 2018
11Profitability of UK companies: April to June 2017 Office of National Statistics, November 2017
12Economic Calendar, Financial Times, January 2018

What we’re thinking

Andrew Ang, Head of Factor
Investing Strategies

“Some cynics have grabbed their share of headlines lately by bemoaning the spread of the 'factor zoo' or claiming that some factor strategies are poised to disappear. It’s true that factors get a fair amount of press. A reporter recently called me about an experiment in which she designed a hypothetical strategy based on a cat factor: holding stocks with the word 'cat' in the name could apparently generate an impossibly astronomical return! I had warm, furry memories (maybe too much fur!) of our 17-pound, affectionate pet. Henry would always come when called, but we unfortunately had to give him away due to family allergies.

“Like our cat, it turns out that the reporter’s approach was not a purr-fect fit. It did, however, highlight in a lighthearted way the proliferation of new factor-based products. So I figured it’s time to talk about how to sort through the noise to identify true factors — those broad and persistently rewarded drivers of returns. Here’s a checklist to determine what’s a robust factor and what’s not.

“Has it created value? There are thousands of investment ideas. But in factor investing, we’re only interested in the ideas that have generated positive risk-adjusted returns over decade. Is there an economic rationale? Strong empirical data is not enough. Factors must be based on both strong economic intuition and academic evidence.

“Is it diversifying? Does the factor provides something different to traditional market capitalisation exposure? Does it add an additional source of returns? A factor that merely replicates an investment tracking the broad stock market, for example, doesn’t offer any diversification. Is it scalable? The final test is whether the factor can be implemented efficiently and cost effectively, ideally in a transparent manner. Here’s what I’d look for: reasonable trading costs, a sensible level of turnover and a high degree of capacity.”

 There can be no assurance that performance will be enhanced or risk will be reduced for funds that seek to provide exposure to certain quantitative investment characteristics ('factors'). Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods. In such circumstances, a fund may seek to maintain exposure to the targeted investment factors and not adjust to target different factors, which could result in losses.

BlackRock Investor Pulse - Moving out of cash

We asked British people if they considered moving any of their money from cash and savings accounts into investments. While some totally reject the idea of putting money into riskier investments, others actively contemplate doing so.

 Have you considered taking steps out
of cash?

have you considered taking steps out of cash

Source: BlackRock Investor Pulse, February 2017. BlackRock Investor Pulse was conducted in association with Kantar TNS in February 2017. A nationally representative sample of over 28,000 people in 18 countries was surveyed. They were aged between 25 and 74 years old. 4,000 were UK residents. The results of this survey are provided for information purposes only. The conclusions are intended to provide an indication of the current attitude of a sample of investors in the UK to saving and investing and should not be relied upon for any other purposes.

Rethinking risk in fixed income – why take an absolute return approach?

Rethinking risk in fixed income

Preservation of capital has become difficult for many investors, as conservative assets offer less return with more risk. A study of drawdowns, peak to trough, for high quality, core fixed income performance suggests many fixed income markets give back their long term returns at some point in time. This raises an important question. How do investors preserve capital in the current fixed income environment? We believe it is equal parts managing risk and providing diversified returns independent of the market.

An absolute return approach in fixed income is designed to provide:

  • Low correlation to both fixed income and other assets
  • A high active return and information ratio
  • To preserve or grow capital when gilt yields decline

Capital at risk. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed. There is no guarantee that a positive investment outcome will be achieved.

Source: BlackRock, January 2018.

Important Information:

This material is for distribution to Professional Clients (as defined by the Financial Conduct Authority or MiFID Rules) and Qualified Investors only and should not be relied upon by any other persons.

Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office:12 Throgmorton Avenue, London, EC2N 2DL.  Tel: 020 7743 3000.  Registered in England No. 2020394. For your protection telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Capital at risk. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

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