UK Equity Growth Briefing –
UK equity markets delivered a relatively muted performance during August as investors’ attention continued to focus on monetary policy – both domestic and overseas – and on ongoing fluctuations in the price of oil.
The Bank of England (BoE) cut UK interest rates to 0.25% during the month, and also introduced further stimulus measures. The reduction – which had been widely expected – took rates to their lowest-ever level, and BoE policymakers remain poised to take additional action if necessary. Meanwhile, the price of a barrel of Brent Crude oil rose above US$50 per barrel during the month, but subsequently fell back following news of higher-than-expected US crude oil inventories.
Medium-sized companies performed better than their larger counterparts during August. While the blue-chip FTSE 100 Index rose by 0.8% over the month, the FTSE 250 Index climbed by 2.6%.
The effect of the UK’s decision to exit the European Union (EU) continued to manifest itself during the month. Although the Government has, as yet, announced no official plans to invoke Article 50 of the Lisbon Treaty – which sets out the process by which a member state can leave the EU – Brexit remained a major focus for many investors in August. According to Markit , UK companies found that the Brexit result had dampened new business activity during July. In the UK services sector, confidence has fallen to its lowest level since February 2009, and Markit warned that the drop in activity had “undoubtedly increased the chances of the UK sliding into at least a mild recession”. At individual company level, builders’ merchant Travis Perkins reported a dip in demand ahead of, and “immediately following” the Brexit referendum.
The National Institute of Economic & Social Research (NIESR) warned that the UK was likely to undergo a “marked economic slowdown” over 2016 and 2016. The NIESR believes that there is an even chance of the UK falling into a “technical” recession, which is defined as two consecutive quarters of negative GDP growth.
Brexit also proved to have a substantial impact on fund flows in June, according to the Investment Association (IA) . Equity funds experienced outflows totalling £2.8 billion during June as investors reacted to the unexpected outcome of the Brexit vote and this included £1 billion-worth of withdrawals from UK equity funds. A further £1.4 billion-worth of property funds was sold during the month.