Duncan Lawrie Online ▼

Posted on: 12 June 2015

The Conservative election victory spurred UK mid-cap companies to all-time highs during May. These companies are more sensitive to the performance of the UK economy than their larger peers and the market took heart from the return to Government by a single party with a working majority.

At a sector level, the election result gave a boost to anything housing related, whether that be house builders like Barratt Developments (up 14%), estate agents like Foxtons (up 29%) or property websites like Zoopla (up 26%). These are highly represented in the UK market's mid-tier, which has performed very well this year. Most UK collective funds have high exposure to this area of the market and we have seen some strong performances from a number of these funds so far.

Commodity-related sectors remain in the doldrums, with mining companies down 3.4% and oil and gas companies down 3.5% in May. Base metals like iron ore and copper have been in a bear market for a while, due to more supply coming on-stream and a slowing of Chinese demand. Performances among the oil majors have been mixed, but Royal Dutch Shell, the largest, has disappointed since its bid for BG. There seems to be little appetite for the shares while the deal awaits approval from a host of international regulators, although we think that long-term performance will validate this deal in due course.

In currency markets, the US dollar began to rally in the second half of the month, following a speech[1] by Janet Yellen (Federal Reserve chair) where she said she expects the US economy to strengthen following its contraction in Q1. She has said in the past, that the timing of interest rate rises will depend on economic data - she confirmed that if the economy improves as she expects, rates will begin to rise this year with the objective of 'normalising monetary policy'.

The dollar rally was felt keenly by the Japanese yen, which weakened to ¥124 versus the dollar. This is a significant level and suggests that the yen may weaken further. The Japanese stock market tends to move inversely to the exchange rate so rallied 5.2% over the month, well ahead of the other major equity markets.

While the election was a big domestic event, it was largely a sideshow for markets that remain focused on the next move for US interest rates. This is likely to take place in the autumn and markets may be volatile in the summer as we get closer. However, provided any rate rises are small and gradual, equity and bond markets should be able to adjust to the change in monetary policy.


To read more news from The Commentary June 2015 edition please click here


[1]22 May Rhode Island: http://www.federalreserve.gov/newsevents/speech/yellen20150522a.htm

All data has been compiled by Duncan Lawrie from sources believed to be reliable. Full details of sources are available on request.

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