Investment Commentary June 2017.

The UK general election surprise was the talking point in June, and investors seemed to take fright from the political uncertainty stemming from the result.

The FTSE All Share fell 2.5%, reflecting some of the nervousness felt in the aftermath of the election but it was two other factors that arguably impacted UK markets more. The first was the weakness in oil. Brent Crude fell 8% in US dollar terms in June, and as a result, the important Oil & Gas sector fell 4.2%.

Perhaps more significant was the sell-off in bond markets towards the end of June. A statement from Bank of England governor, Mark Carney, expressing concerns about needing to raise interests rates, caused a sharp spike up in yields, leading to losses for fixed income markets. The FTSE Gilts All Stocks index, the standard benchmark for the UK government bond market, was down 2.5% in June.

The bond moves also impacted certain UK equity sectors. Defensive areas, such as consumer goods, health care, utilities, and telecoms were all laggards. These are sectors which have historically benefited from lower bond yields. On the flip-side, higher bond yields are good for banks and insurers, and the Financials sector was the best performing part of the market, rising 0.47%.

As the market began pricing in a potential interest rate rise in the UK, sterling strengthened, rising 2.3% against the US dollar. The strong sterling acted as a headwind for all overseas assets and returns reflected this. The MSCI Europe ex UK fell 1.38%, and the S&P 500 was off 0.04%.

The area of the market that delivered the best returns was Asia, with the Chinese equity market (MSCI China) rising 5.8% in sterling terms.

Guy Myles, Chairman, Flying Colours Investment Committee