Greece is no longer daily front-page news, the first time seemingly for aeons.
Now the Greek distraction has been sidelined, at least temporarily, global investors’ attentions have returned to three principal concerns.
Slowing Chinese growth
The published 7 per cent Chinese GDP growth rate for the first half of the year seems increasingly implausible. Other data, including imports, exports and the purchasing managers’ surveys, point to lower economic activity than that reported. Major international companies, such as BMW, Volkswagen and Burberry, have all reported increasingly challenging trading conditions in China. The knock-on effects for the rest of Asia and more broadly are being felt.
Commodity prices
Having apparently stabilised in the second quarter of 2015, commodity prices – notably oil, iron ore and gold – weakened again in July. All have suffered directly or indirectly as a result of China’s sluggish activity and, as they are priced in dollars, have been affected by the recent strengthening of the US currency, as markets currently anticipate US interest rate rises beginning later this year.
UK and US rate rises
Economic conditions continue to improve in the UK and US, much of which is reflected in tightening labour markets and wage inflation, which are key determinants of current interest rate policy.
In July there was little surprise that both the Bank of England (BoE) and the US Federal Reserve hinted at rate rises before the end of the year. Both have indicated that rises are likely to be in small increments, with the BoE suggesting an eventual rate of around 2.5 per cent as the ‘new normal’. Rising rates have tended to cause their related currencies to appreciate historically; were the dollar to appreciate further, this could apply downward pressure on global commodity prices for some time yet.
Global investors are also keeping a close eye on the instability of the domestic China A-Share market. In spite of significant intervention by the Chinese authorities over the past month, including bans on short selling and directors’ sales, high levels of volatility persist. The second biggest daily fall in the Shanghai Composite index’s history was witnessed on July 27 when it tumbled 8.5 per cent. We expect further volatility.
At home, July saw the first wholly Conservative Budget since Ken Clarke’s in 1996. This one proved a dismal affair for many investors, as George Osborne increased personal taxation on dividends by 7.5 percentage points over the taxpayer’s own current dividend tax rate. This applies to any individual’s aggregate annual dividend income in excess of £5,000.
This additional tax burden does not help. Other new measures also limit mortgage interest and maintenance expenditure taxation reliefs in the buy-to-let sector. The latter might be more difficult to defend, nevertheless income-seeking savers who have sought to diversify their incomes by investing in rental properties as well as equities have suffered a painful and unexpected double whammy in this Budget. We hope this isn’t a sign of more policies in a similar vein over the next five years.
John Chatfeild-Roberts is chief investment officer at Jupiter Asset Management