August proved a torrid month for investors around the world and the UK was no exception. Although worries over the outlook for Greece and the eurozone, which had been a major influence on investor sentiment in recent months, retired to the side-lines, they were superseded by a huge surge in concern over China’s slowing economy.
The FTSE 100 fell 6.7% over August as a whole but, at its lowest point during the month, the UK’s main benchmark index had dropped almost 17% below its all-time high, which it achieved in April this year. Medium-sized and smaller companies also declined during August, although they fared less badly than their larger counterparts, which tend to have more exposure to global pressures. The FTSE 250 index fell 3.2% over the month while the FTSE SmallCap index dropped 2.4%.
Share prices in the mining sector suffered particularly steep falls over August as a result of concerns over the effect of China’s slowdown and the prospect of further deterioration in demand for raw materials. During the month, BHP Billiton reported an 86.2% slump in annual profits, while Rio Tinto revealed an 82% drop in first-half net earnings.
Turning to the financial sector, insurer Standard Life announced a 6% increase in interim pre-tax profits, but warned that margins in its annuities business had been adversely affected by the recent reforms to the UK’s pensions system. The government cut its stake in Lloyds Banking Group once again during August, bringing it below 13%, and also sold a 5.4% stake in Royal Bank of Scotland at 330p each, raising about £2.1bn and cutting the UK taxpayer’s total stake in the bank to 72.9%.
The Confederation of British Industry (CBI) expects the UK to generate “decent” quarterly economic growth, driven by firmer household spending and “robust” investment growth, although export activity could be dampened by sterling’s strength. The CBI raised its forecast for growth this year from 2.4% to 2.6% and for next year from 2.5% to 2.8%. The UK economy expanded at an annualised rate of 2.6% during the second quarter of 2015. The CBI has predicted the Bank of England will implement a rate rise during the first quarter of 2016. According to Markit’s Household Finance index, 48% of UK households anticipate an increase in interest rates during the next six months, while 78% expect an increase in the next 12 months.
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