Market update – October 2013

The continuing political deadlock in the US is starting to dent stock markets, with the FTSE100 down 4% in the past 3 weeks. US politicians’ inability to reach a deal over US debt and prevent a partial shutdown of government services is increasingly concerning markets.

The hope now is that the situation can be resolved before the 17th October, the date on which the US could default on its government bonds. The knock-on effect of this would inevitably impact on the global economy. The previous deadlock in 2011 lead to a downgrade of the US ‘AAA’ credit rating but actual default was averted at the last minute.

Meanwhile, the International Monetary Fund (IMF) has cut its forecast for global growth to 2.9% this year and 3.6% next year. Despite the improvement in growth in advanced economies such as the UK and US, the IMF warned that a slower pace of expansion in emerging economies such as Brazil, Mexico and India, plus increasing concern about China’s growth rate, was holding back global expansion. China is also the US’s largest creditor should a default occur.

The outlook from the IMF on the eurozone was more positive, with business confidence indicators suggesting activity is close to stabilising in peripheral economies, such as Italy and Spain, and already recovering in core economies such as Germany. Overall, it predicts growth in the eurozone will fall 0.4% this year, an improvement of 0.1% on its July prediction, and grow 1% next year.

More positive news on the UK economy as the IMF increased its forecast for UK growth to 1.4% this year and 1.9% next year, crediting recent data indicating higher consumer and business confidence for the increase. However, it warned that it would still take years for the UK economy to recover fully from the 2008 financial crisis.

UK new car sales, which are traditionally considered an indicator of consumer confidence, had their best month since 2008, with over 400,000 new cars registered in September. One possible reason for the increase is consumers spending their windfalls from the PPI mis-selling scandal, providing an unexpected boost to the economy.

The Irish economy has also emerged from recession, with an official growth figure of 0.4% for the second quarter of 2013 and exports increasing by 4.3%.

There are signs that house prices in both the Republic of Ireland and Northern Ireland are stabilising. The NI Residential Property Price Index indicates that property prices rose by 2% between the first and second quarter of this year, with all property types showing an increase in value for the first time since 2007. There is much more activity from first time buyers, who are accounting for the majority of new home purchase loans, according to the Council of Mortgage Lenders in Northern Ireland.

However, the August Northern Ireland Economic Outlook showing average property prices are 53% below their 2007 peak and average prices still fell by 5.9% in the year to the end of March 2013.

Meanwhile the Purchasing Managers Index (PMI) for Northern Ireland, produced by Ulster Bank, showed business activity grew for the third month in a row, with a marked improvement in construction activity and increases in orders and employment levels.

Despite the current concerns on the US and continued uncertainty about the impact of the eventual withdrawal of Quantitative Easing, year to date the FTSE100 remains well up on its starting position in January with gains of 7.5%. The average mixed asset fund in the moderate sector (IMA Mixed Investment 40%-85% Shares) is up 11% year to date, although most of this growth came in during the first few months of the year. Most funds saw a slight dip at the end of August as Syria’s use of chemical weapons came to light and international military intervention seemed a real possibility.

The new Governor of the Bank of England, Mark Carney, has indicated that the base rate is unlikely to increase from 0.5% until 2015 at the earliest, linking any increase to a fall in the unemployment rate to 7% or below. The Bank also expects inflation to remain well above its target of 2% for the foreseeable future.

The privatisation of Royal Mail has triggered a buying frenzy and much criticism of the government for its flotation price. Ten million shares changed hands in the first 10 seconds of conditional trading last Friday, with the share price closing at 455p, up 38% from the sale price of 330p. 690,000 private investors were allocated £750 of shares each, while the government rejected any bids from private investors above £10,000, favouring small investors and the large institutional buyers.

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