CONTRIBUTORS
Ben Russon, CFA
Lead Portfolio Manager & Research Analyst
Martin Currie
July saw the second largest monthly fall in UK inflation in 20 years which boosted domestically focussed equities, and the Chancellor also outlined plans to boost investment in growth businesses.
The well trailed Mansion House speech from the Chancellor of the Exchequer Jeremy Hunt included reforms to encourage pension funds to invest in high growth businesses and private equity which could increase investment in British firms by £50bn by 2030. We await to hear details as to how this can be administered effectively but the fact that policy makers are taking steps to help secure growth funding for British businesses is a positive step.
UK headline inflation for June came in at 7.9% falling from a previous reading of 8.7%, lower than economist expectations. Markets reacted positively to the news with domestically orientated and interest rate sensitive stocks leading advances as base rate expectations and swap rates fell in the aftermath. Investors will now be focussing on the next inflation data point on the 16th of August and whether a further downside surprise will be repeated. A slackening of the labour market and steadier energy prices along with a global trend of cooling inflation support this more benign inflationary outlook, but core inflation (excluding energy, food, tobacco and alcohol prices) still looks well underpinned for now.
Given the expectation that peak rates are now in sight in the UK with one, possibly two more 0.25% hikes expected and a softening of inflation, we are likely to move into a period of real wage growth and real interest rates in the coming months. This presents an attractive opportunity set for many sectors in the economy and broadly a return to a more normal monetary policy backdrop.
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