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Aon Retirement and Investment Blog

Weekly Update - 10 July 2017 (UK/Europe)

NEW INTELLECTUAL CAPITAL

  • Making Portfolios More Fee-Efficient. Investment management fees are highly relevant to portfolio performance.  Making portfolios more fee-efficient is not necessarily about reducing fees. Rather, it is about paying for things that add value, and not paying for things that don’t.   While efforts often focus on asset allocation and manager selection, it is also important to negotiate aggressively and combine skilled managers in the most fee-efficient way.  We describe a toolkit of approaches for making portfolios more fee-efficient.
  • Managing Health Care Reserves: Aligning Operating Assets with Broader Organizational Goals. According to the American College of Healthcare Executives’ 2016 annual survey of top issues confronting hospitals, financial challenges continued to rank as #1.  It becomes critical to consider the interlinked effects from changes in investments and in financial metrics within an Enterprise Risk Management (ERM) framework.  Find out more about this in our latest paper on aligning operating assets with broader organizational goals.
  • U.S. Sample Annuity Rates. Monthly update for pricing of U.S. annuity purchases as of 30 June 2017.
UPCOMING EVENTS
  • Managing Retirement Programs in the Utility Industry: Trends and Benchmarking. Join our  next Retirement & Investment U.S. webinar on July 25th at 12 noon CT. While retirement programs provide critical benefits for employees, they represent substantial cost and risk for plan sponsors. Utility companies employ diverse design, financing, and investment strategies when managing their programs. During this webinar, we’ll take a closer look at these strategies and share benchmarking data and trends in the utility industry.
MARKET MOVES
  • Global equity returns were little changed in a week in which economic data was mixed, latest meeting minutes from the major central banks revealed a more hawkish stance, and North Korea tested their new missile. The MSCI AC World Index rose 0.1% in local currency terms and 0.7% in sterling terms. The UK was the best performing region in local currency terms (0.5%) despite weak economic data releases over the week. Developed Europe ex UK was the best performing region in sterling terms (1.1%). Developed Pacific ex Japan was the worst performing region in local currency terms (-0.5%). Japan was the worst performing region in sterling terms (-0.9%).
  • The UK gilt yield curve steepened over the week with yields falling at the short end of the curve but rising at longer maturities. The 10 year UK gilt yield rose by 18bps to 1.37% and the 20 year UK gilt yield rose by 5bps to 1.93%. The 10 year US treasury yield rose by 9bps to 2.39% as minutes from the US Federal Reserve’s meeting in June indicated toward policy makers’ focus on trimming the Fed’s $4.5 trillion balance sheet. Strong employment data further pushed the yields higher. European government bond yields rose across the region (except Greece) after the European Central Bank’s meeting minutes revealed that the policy makers were considering an end to ultra-loose monetary policy. German bund yields rose by 10bps to 0.57% and French government bond yields rose by 12bps to finish the week at 0.94%. Italian government bond yields rose by 17bps to 2.33% as the Italian government rescued their oldest bank Banca Monte dei Paschi di Siena.
  • UK real yields rose over the week. The 20 year real yield rose by 9bps to -1.49% and Over 5 year real yield rose by 10bps to -1.47%. 20 year breakeven inflation fell by 3bps to 3.34%.
  • The US high yield bond spread over US treasury yields rose by 6bps to 383bps. The spread of USD denominated EM debt over US treasury yields finished the week 6bps higher at 316bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) remained unchanged at 107bps.
  • The S&P GSCI fell by 1.8% in USD terms over the week. The energy sector fell by 3.6% as the price of Brent crude oil decreased by 1.8% to $47/BBL. Industrial metals fell by 0.7% as copper prices decreased by 2.1% to $5,804/MT. Agricultural prices rose by 2.9% whilst gold prices fell by 2.7% to $1,210/ounce.
  • Sterling depreciated against major currencies over the week (except yen) due to weak economic data. The US dollar appreciated by 0.8% against sterling, ending the week at $1.29/£. The euro strengthened by 0.7% against sterling, finishing the week at €1.13/£. The Japanese yen depreciated by 1.4% against the US dollar, ending the week at ¥113.99/$.
ECONOMIC RELEASES
  • The US began last week in positive fashion as the keenly-watched Institute of Supply Management's (ISM) manufacturing index rose sharply to 57.8 from 54.9; the highest level in nearly three years. A milder 0.4 point increase had been forecasted. The strong showing by the manufacturing sector was replicated, albeit to a lesser extent, in other areas of the economy as the ISM Services/Non-Manufacturing Composite index rose to 57.4 from 56.9 and above expectations of a slight dip to 56.5. Labour market data was more mixed; non-farm payrolls outperformed expectations and increased by 222k in June, up from a revised 152k in May and estimates of 178k. Meanwhile, wage growth narrowly missed forecasts as average hourly earnings grew by 2.5% in the year to June, instead of 2.6% estimated.
  • In the UK, economic data releases over last week reflected a softening in the economy. Industrial production data for May fell by -0.1%, falling short of market expectations of a 0.4% increase month-on-month. Manufacturing production data underperformed expectations of 0.5% growth and fell too; a decline of 0.2% undoing the gains made in April. The final Markit UK Services PMI for June came in just shy of estimates at 53.4, down from 53.8. This left the Composite PMI at 53.8, remaining at the lowest level since February. Likewise, the Manufacturing PMI fell to 54.3 from 56.7, falling short of consensus expectations of 56.3. The trade balance release in May showed a larger than expected widening in the deficit, rising to £3,073m from April’s revised figure of £2,116m.
  • Eurozone releases over the week were largely positive, with a solid set of finalised PMI data for June. The Markit Eurozone PMI releases were largely expected to remain unchanged but both the services and manufacturing PMI's were revised higher to 55.4 (vs. 54.7) and 57.4 (vs. 57.3) respectively. As a result, the Composite PMI rose from 55.7 to 56.3. Markit PMI data for Germany was similarly robust with the final services PMI for June rising to 54.0 from 53.7, whilst the composite PMI increase to 56.4 from 56.1. Retail sales data in May was also encouraging, increasing 0.4% as expected on a monthly basis, and up 2.6% annually (from 2.3% expected and unchanged from the revised reading for April). Industrial production reports were positive in the Euro area; output in Germany surged by 1.2% over May, far exceeding expectations of 0.2%, with data from Spain and France also ahead of forecasts. Unemployment data for the Eurozone met expectations and was unchanged at 9.3%.
  • Japanese economic data was generally positive. The Bank of Japan’s Q2 2017 Tankan survey revealed an optimistic outlook for the economy which surpassed analyst expectations. The Tankan large manufacturer’s index rose to 17 from the previous reading of 12. Similarly, the large non-manufacturer's index increased from 20 to 23, meeting forecasts. The services PMI rose to 53.3 from 53.0 and the finalised manufacturing PMI was marginally revised upwards to 52.4 from 52.0 over the same period. Despite the seemingly improving economic conditions, consumer confidence for June decreased by 0.3 points to 43.3.
  • There was not much in terms of economic releases in China last week. Most significantly, the Caixin Manufacturing PMI rebounded after falling for the past four consecutive months, rising from 49.6 to 50.4, outperforming analyst expectations and representing a return to expansionary territory for the manufacturing sector. The Caixin Services PMI, meanwhile, slipped 0.6 points to 51.6. China's foreign exchange reserves missed forecasts of U$3,061bn but continued on an upward trend to reach U$3,057bn from U$3,054bn.
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