Market commentary: Quarter 2 2016 August 2016

Market commentary: Quarter 2 2016

Economic data in the UK was mixed in the second quarter (Q2). On a positive note, unemployment fell to 5%, the lowest level since 2005. By contrast, measures of activity in the manufacturing and services sectors fell slightly, indicating growing caution in the run up to the EU membership referendum on 23 June. The referendum result when it came was a surprise to most market participants and casts significant uncertainty over the outlook for the UK economy.

The euro area continued to grow at a modest pace in Q2. Retail sales, industrial production and corporate confidence measures showed similar momentum to the previous quarter. Meanwhile, the inflation rate edged back above zero. Whilst signalling an end to deflation, this is still far off from the European Central Bank’s inflation target of 2%.

The US economy continued to perform at a steady pace. Unemployment fell below 5% and core inflation came in at 2.2%. This is now above the Federal Reserve’s 2% target, which suggests that a second interest rate hike could be on the cards.

The Chinese economy appeared to lose momentum in the second quarter. Data from the manufacturing sector suggested that that part of the economy is now contracting. However, this was partially offset by an improvement in data from the services part of the economy.

Finally, in Japan, the yen appreciated by 9% against the US dollar, helping to push down import costs and therefore inflation. In fact, Japan fell back in to mild deflation for the first time since Prime Minister Shinzo Abe introduced his ‘Abenomics’ programme to stimulate the economy in 2013.

Key takeaway

What should investors do in response to these developments?

Many investors change their portfolios in a bid to take advantage of the latest news. However, it’s very difficult to time these changes effectively.
In practice, shifting your portfolio in response to short-term events may lead to little more than increased trading costs.

Moreover, what might seem like a comfortable short-term move can often prove harmful to performance. For example, on the day of the Brexit result, investors who moved their portfolios into UK assets did worse than those who maintained a global approach, partly because of the weakness of sterling.

This simple example illustrates the importance of staying disciplined rather than reacting to any short-term developments.

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Independent Financial Advisors