July 2024 Investment & Economic Update

Two paths to take in wooded area

Our latest monthly investment update for July 2024 examines how the global investment markets, economy, and commodities are performing.

The FTSE 100 index of leading UK company shares closed at the end of June at 8,164.12, down 66.93 points or 0.81% during the month.

Market Response to Elections

On Monday, the FTSE 100 and European markets rose, with French stocks leading as investors predicted a hung parliament following the first round of French parliamentary elections. The CAC index had hit its lowest level since January on Friday.

France’s far-right alliance won the first round, positioning Marine Le Pen’s party to potentially form the country’s first far-right government.

Jim Reid at Deutsche Bank noted, “The first round of the French elections perhaps delivered a slightly less convincing victory for the far-right than final polls suggested and with other parties now seemingly open to form alliances in the second round, this is likely to further reduce the far-right’s chance of an overall majority in parliament.”

The euro also strengthened against the US dollar, rising 0.55% to $1.0771, its highest level in over two weeks.

Revised GDP Figures

According to the Office for National Statistics (ONS), the UK economy grew by 0.7% in the first quarter, revised up from an initial estimate of 0.6%. Services, including hairdressers, banks, and hospitality, saw a 0.8% increase. The production sector grew by 0.6%, while construction declined by 0.6%.

Economic growth has become a major issue in the upcoming election as the UK recovers from COVID-19. Having experienced lagging growth in recent years, the UK recorded the strongest growth among G7 nations last quarter.

Spending Restraints Reversal

Economists predict Rachel Reeves will receive a £16bn spending boost from official forecasters if Labour wins the General Election. The Office for Budget Responsibility (OBR) would nearly double the fiscal headroom from the £8.9bn announced in the March Budget.

Capital Economics, a consultancy, stated that this new forecast would enable Labour to either reverse some spending restraints or the freeze on personal tax thresholds, but not both.

This shift in public finances follows a downward revision of the OBR’s borrowing forecast by around £5bn annually over the next five years due to increased tax revenues from recent wage growth. If Capital Economics’ predictions hold, the next chancellor could have up to £27bn in fiscal headroom, assuming deeper interest rate cuts and higher-than-expected tax revenues from rising house and equity prices.

However, the OBR’s forecast for public finances could vary significantly, ranging from a £13bn deficit to a £38bn surplus, equivalent to 1.4% of GDP.

Market Surge Anticipation

Younger retail investors anticipate a surge in UK markets and an increase in their stock market holdings if there is a change in government.

A survey of 1,000 UK-based retail investors revealed that about two-thirds of those aged 18 to 44 believe a new leadership in Downing Street will boost the value of British-listed stocks. This figure drops to 44% when considering all age groups, compared to 30% who disagreed, according to research by trading platform eToro.

Among Labour voters, 68% expect a new government to benefit UK shares, while about a quarter of Tory voters share this view.

Rising Mortgage Costs

According to Nationwide, high mortgage rates continue to make affordability challenging for many home buyers. Although earnings have risen faster than house prices in recent years, this hasn’t been enough to counteract the impact of higher mortgage costs.

In June, house price growth was stable, with a 0.2% increase from the previous month. The average house price now stands at £266,064, up 1.5% from a year earlier. However, housing market activity has been flat over the past 12 months, with transactions down about 15% compared to 2019.

Nationwide noted that the market still feels the effects of increased mortgage rates, which have climbed since the Bank of England began raising its key interest rate in late 2021.

Robert Gardner, Nationwide’s chief economist, highlighted that mortgage rates remain significantly above the record lows of 2021. For instance, the interest rate on a five-year fixed mortgage for a borrower with a 25% deposit was 1.3% in late 2021, but has recently been around 4.7%. As a result, housing affordability remains strained.

Autumn Cost Increase

Domestic gas and electricity prices have recently dropped due to Ofgem’s new price cap for England, Wales, and Scotland, which took effect on Monday. This change reduces the typical household energy bill by £122 annually, bringing it down to £1,568—the lowest in two years. However, costs are expected to rise again in October. Consultancy Cornwall Insight forecasts that a typical household’s annual bill will increase to £1,723, a £155 or 10% rise.

Adam Scorer, chief executive of the charity National Energy Action, noted, “Modest falls in summer look set to be wiped out by bigger rises in autumn when people will need to put the heating back on. The cost of energy remains an unaffordable luxury that many of the poorest simply cannot afford.”

Stocks Open Higher

Wall Street’s main stock indexes opened higher on Monday, anticipating the release of manufacturing PMI numbers and upcoming labour market data, which could influence expectations of interest rate cuts by the Federal Reserve.

The Dow Jones Industrial Average rose by 67.34 points, or 0.17%, to 39,186.20. The S&P 500 increased by 10.60 points, or 0.19%, to 5,471.08. Meanwhile, the Nasdaq Composite gained 41.29 points, or 0.23%, reaching 17,773.90 at the opening bell.

US stocks fluctuated at the start of July as traders prepared for numerous economic reports and assessed the impact of France’s election on markets.

Ahead of Friday’s crucial US jobs report, data indicated that US factory activity slightly contracted for the third consecutive month in June, with prices falling by the most in over a year.

US factory activity contracted slightly for the third consecutive month in June, with prices falling at the fastest rate in over a year. The Institute for Supply Management’s manufacturing gauge was nearly unchanged, registering at 48.5 compared to 48.7 the previous month. This figure remains below the 50 mark, which separates contraction from expansion.

Additionally, traders are adjusting their strategies following last week’s presidential debate. Morgan Stanley strategists advise equity investors to “stay selective.” The firm also noted that the increasing likelihood of a Donald Trump victory makes yield curve steepeners more appealing.

UK Investment Focus

One of the UK’s largest workplace pension providers, Legal & General, has launched a new fund aimed at investing billions into private companies. The Private Markets Access Fund will provide “private market access” to the 5.2 million members of defined-contribution schemes.

The fund will significantly favour UK investments, with up to 40% of the portfolio allocated domestically. Legal & General plans to invest £500 million into the fund by the end of this year and aims to reach £1 billion by the end of 2025, potentially directing up to £400 million into UK businesses over the next two years.

This launch is part of Legal & General’s strategic shift towards private markets. Last month, the company announced the integration of its private equity arm, Legal & General Capital, into its main investment management business.

Hydrogen Support Scheme

Two major insurance companies, Zurich and Aon, have launched a new scheme to support hydrogen production, which is crucial for the transition to clean energy. This initiative will unite various insurers, led by Zurich, to underwrite smaller individual projects with capital expenditures of up to $250 million that would otherwise struggle to secure insurance. These projects will receive comprehensive coverage, from construction to operational risks.

This development addresses concerns about the insurance industry’s capacity to provide the necessary coverage for green energy projects, which require trillions of dollars.

Joseph Peiser, Aon’s global chief executive of commercial risk, noted that insurance can often be the decisive factor for these smaller projects.

The scheme focuses on two primary low-carbon methods of producing hydrogen: “blue” hydrogen, made from methane gas with captured carbon emissions, and “green” hydrogen, produced by splitting water using renewable electricity. Although green hydrogen is currently available only in small quantities, it is the least polluting method.

Market Data

£1 buys $1.2671 or €1.1796. Gold is $2,330.90 an ounce, and UK natural gas futures are 78.68p/therm, down from 83.09p/therm at the start of June. The UK 10-year gilt yield is 4.261%, down from 4.321% at the start of June.

Kellands will continue to keep you updated on market developments on a regular basis. However, if you have any questions or need some financial advice in the meantime, please do not hesitate to get in touch.

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July 2, 2024

July 2024 Investment & Economic Update

Our latest monthly investment update for July 2024 examines how the global investment markets, economy, and commodities are performing.
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