MONTHLY MARKET REVIEW

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1 MONTHLY MARKET REVIEW Highlights for July 2014 UK While UK equities rose at the start of July, they then fell sharply and ended the month only marginally lower. Despite reaching a near high on 4 July, the FTSE All- Share index subsequently suffered from another flurry of concerns and finished the month down by 0.3%. Shares in technology companies underperformed; they fell during the middle of the month but then rose again, finishing down almost 3.5%. The sector took its lead from the US, where the NASDAQ moved lower following comments from Federal Reserve (the Fed) chair Janet Yellen that the valuations of some small stocks, including social media, were overvalued. This was the first time that she had made such specific comments about the market. The basic materials sectors produced by far the strongest returns over the month, rising by over 7%. Anglo American s share price rose as it announced that it would be selling off its oldest South African platinum mines. This follows chief executive Mark Cutifani s pledge to either invest in assets or to sell them. Financials also moved higher. In the last few days of the month, Royal Bank of Scotland s shares rallied as it reported first-half profits before tax that were nearly double those of the same period last year. The bank said that the improvement was mainly due to the recovery in the UK economy. In contrast, Standard Chartered Bank s share price was slightly down after its second profit warning in seven months. In economic news, the first estimate for second-quarter Gross Domestic Product (GDP) came in at 0.8%, which translates into an annual rate of growth of 3.1%, the fastest since the end of While the economy is very clearly continuing to improve, the minutes from the July's Monetary Policy Committee meeting revealed that there are still some concerns among members about raising rates too early. In the housing market, the prices being asked by homeowners fell for the first time this year, according to property website Rightmove. Shares fall for a second month The economy continued to strengthen Interest rates remained unchanged

2 America US equity markets were slightly down in July, with a negative return of -1.2% from the FTSE North America index in local currency, total return terms. At the sector level, there was something of a reversal in the pattern of returns from last month; information technology and telecoms were the strongest performers, while the defensive utilities sector fell the furthest. With the weather-induced weakness of the first quarter now well out of the way, the US economy continued to make steady progress over the month. There was good news in the housing market, with an uptick in home resales, which were reported to have reached an eightmonth high in June. Improvements in the labour market played a significant part in the ongoing recovery in housing as unemployment continued to fall. In her twiceyearly testimony to Congress, Fed chair Janet Yellen said that interest rates might rise sooner than currently expected if this trend continues. As part of her testimony Ms Yellen also made comments on both the equity and bond markets, for the first time. With regard to US equities, she said that valuations of some companies, particularly smaller ones in the biotech and social media industries, appear overvalued. Shares briefly dipped on these remarks, and also a few days later when it was reported that a passenger plane had been shot down over Ukraine. They subsequently recovered, although concerns about a potential escalation of the crisis in Ukraine and the impact of sanctions on Russia still linger. Turning to the corporate sector, the second-quarter earnings season started well, with over 75% of companies reporting figures that were better than analysts had expected. However, while Apple reported profits that far exceeded forecasts, it also said that sales of the ipad had fallen, which led investors to speculate that they had reached their peak. Apple s shares moved lower although they subsequently recovered, helping to propel the Standard & Poor's (S&P) 500 index to a record high. Meanwhile, Facebook s share price rose to a record high as it reported results that showed that revenue from mobile advertising was growing rapidly. Shares fell over the month The economy continued to make steady progress Corporate results were strong Europe European equities continued to fall in July. The FTSE World Europe (excluding UK) index ended the month down 2.6% in local currency, total return terms. At the sector level, technology led the way, followed by health care. The oil & gas sector fell the furthest as the oil price moved lower over the month. Investors sentiment towards Europe continued to be influenced by a number of issues. On the negative side, there was some weak economic data, concerns about how sanctions on Russia might affect the region, and worries about the results of bank stress tests, which are due in October. On the positive side, there was also some encouraging economic data and sentiment remained supported by measures taken by the European Central Bank (ECB). The Composite Purchasing Managers Index, which provides a good early indicator of overall growth, rose to 54.0 in July. This is its highest level since April. However, on the downside, it was reported that industrial production for the region had also fallen sharply in May following a rise in April, although the timing of public holidays may have played a part in this. Meanwhile, data from France, the region s second largest economy, remained disappointing. The International Monetary Fund (IMF) lowered its forecast for growth in France this year from 1.0% to 0.7%. The IMF also criticised the ECB s handling of the Eurozone economy, saying that it had not done enough to encourage growth and meet its 2.0% inflation target. It strongly suggested that the ECB should now consider purchasing government bonds (i.e. quantitative easing) to boost inflation and to stimulate the demand for credit. The annual inflation figure for the region was just 0.4% in July.

3 The financials sector endured a tough time in early July, when it emerged that Portuguese bank Banco Espirito Santo had missed a debt payment, leading to renewed concerns about the banking sector as a whole. Elsewhere in the corporate sector, the shares of luxurygoods company Louis Vuitton fell after the company reported disappointing first-half profits, the result of weaker demand from Asia. Shares fell over the month Economic data was mixed The IMF criticised the ECB s handling of the economy Other Global Equity Markets Japanese equities again outpaced those in other developed markets over July. In local currency, total return terms, the broad-based Topix index generated a return of 2.1%. At the sector level, the best performance came from electrical appliances & precision instruments. Financial companies were by some margin the weakest performers, while energy resources also lagged. As expected, the Bank of Japan again chose to leave the country s accommodative monetary policy unchanged at its July meeting. In its accompanying report, the central bank raised its assessment of the economy for the first time in six months amid an improvement in personal spending. This was encouraging as spending had initially fallen following the increase in the sales tax at the start of April. However, exports remained weak and consequently the bank lowered its forecast for growth this year, from 1.1% to 1.0%. Elsewhere in Asia, equity markets rose and the FTSE World Developed Asia index finished the month up 3.1% in local currency, total return terms. Sentiment towards China, which plays a key role in the direction of Asian and many emerging markets, improved as Chinese GDP for the second quarter of the year came in at 7.5%, up from 7.3% in the first quarter. Retails sales and industrial production both also improved in June. Elsewhere, Indian equities again moved higher amid expectations of increased infrastructure spending as the Reserve Bank of India offered incentives to infrastructure companies to raise money through the bond markets. On the downside, Russian equities fell sharply following the shooting down of a passenger plane over Ukraine and the subsequent announcement of sanctions on Russia. Turning to Latin America, the Brazilian equity market was particularly strong amid a poll that pointed towards diminishing support for current president Dilma Rousseff, whose policies have been blamed for the poor state of the Brazilian economy. Elections will take place later in the year. The Mexican market also rose amid continuing economic growth. A significant proportion of this is due to the manufacturing sector; as wages in China have increased, the attraction of Mexico as a manufacturing base has improved. As a group, emerging markets again moved higher over July. The FTSE Emerging Markets index gained 2.8% in local currency, total return terms. Most Asian and emerging equity markets rose over the month However, the Russian market fell Economic growth in China improved Bonds Government bond yields moved higher and prices lower in the UK and US. Meanwhile, the yield on the 10-year German Bund continued on a downward trajectory, pushing prices up. While equity markets in many parts of the world rose over the month, investors also again sought the perceived safe haven of government bonds as the crisis in Ukraine escalated and the conflict between Israel and Gaza also worsened. Data for the US economy continued to be broadly encouraging and as a result, Federal Reserve chair Janet Yellen said that interest rates might rise sooner

4 than currently expected. The yield on 10-year US Treasuries moved to 2.56% in the last week of the month, while the S&P 500 reached an all-time high. It was a similar situation in the UK, where the first estimate for second-quarter GDP came in at 0.8%, which translates into an annual rate of growth of 3.1%, the fastest since the end of Yields on 10-year Gilts moved up to 2.74% in the final few days of the month. In the Eurozone, the threat of sanctions on Russia as a result of the shooting down of a passenger plane over Ukraine was felt in bond markets and yields on German bunds reached near record lows. German business confidence dropped to its lowest level since October as the corporate sector worried about Germany s reliance on Russian gas imports. Corporate bonds underperformed UK government bonds in July as yield spreads - the difference between the two - widened. High yielding bonds lagged investment grade, delivering a negative total return over the month. Real Estate Returns from the UK commercial property market were higher than expected as strong investor sentiment and a limited supply of quality properties ensured that the market surged ahead. According to the Investment Property Databank (IPD) monthly index, total returns during June 2014 (the latest data available) were 2.1%. Capital values rose 1.6%, while income returns were 0.5%. Capital values have now seen 14 consecutive monthly gains, and so far this year have risen a cumulative 5.8%. The real estate recovery continues to be fuelled by strong buying activity, rather than rental growth. Rents remain lacklustre at an all property level, rising only 1.3% so far this year, and driven entirely by growth in the office and industrial sectors. At a sector level, industrials and offices outperformed during June, both returning 2.5%. The retail sector continues to make the slowest recovery, returning 1.6%. Retail rents have remained weak so far this year, as high street vacancies and competition from online retail negatively affect the sector. The sector is very polarised, though, with central London retail still providing higher returns than any other market segment. Conversely, industrials are benefitting from changing shopping patterns as demand increases for storage facilities and parcel hubs in order to cope with the everincreasing demands of online shoppers. Demand for secondary assets, particularly in the office and industrial sectors, is increasing with many investors willing to take on more risk in order to achieve higher yields. Commodities Geopolitical concerns continued to be a key influence on the price of commodities in July. The attraction of gold as a perceived safe haven initially came to the fore again against a backdrop of escalating anger towards Russia following the shooting down of a passenger plane over Ukraine, and also the on-going crisis in Iraq and the hostility between Israel and Gaza. Events in Ukraine and the sanctions that are subsequently due to be imposed on Russia meant that the price of palladium continued its rise significantly. Russia is one of the world's largest producers of the metal, which is used mostly in pollution control devices for vehicles. Given the problems in Russia and the Middle East, it was perhaps surprising that the Brent crude oil price dropped considerably following its spike up in June. However, this was mainly due to a resumption of oil supplies from Libya. In the natural gas market, prices also moved down over the month; mild temperatures in the US and near record levels of supply more than offset concerns about Russia, which supplies around 40% of Europe's natural gas. Mild temperatures in the US also had a significant impact on soft commodities, with corn and soya bean yields in Iowa, the biggest producer in the US, expected to reach record levels. Currencies Sterling continued its considerable rise against the euro over the month. While economic data in Europe remains lacklustre, the UK economy continues to rebound. The first estimate for second-quarter GDP came in at 0.8%, which translates into an annual rate of growth of 3.1%, the fastest since the end of 2007.

5 Meanwhile, the US dollar strengthened further in July as the US labour market continued to improve. In particular, the dollar climbed to an 8-month high against the euro as inflation picked up and the US jobless rate fell to its lowest level in 8 years. However, this move was also a reflection of heightened concerns over the rate and sustainability of economic recovery in Europe. German business confidence dropped to its lowest level since October during the month, while the International Monetary Fund lowered its forecast for growth in France this year from 1.0% to 0.7%. Elsewhere, the New Zealand dollar fell when the country s central bank announced that it would cease increasing interest rates for the time being following four rate rises so far this year. The Russian ruble also gave back some of its more recent gains amid further escalation of the crisis in Ukraine; this was even after the Central Bank of Russia unexpectedly raised borrowing costs in an attempt to control inflation and reduce capital outflows. Important Information Forecasts are opinion only, cannot be guaranteed and should not be relied upon when making investment decisions. The forecast of future performance is not a reliable guide to actual future results. Past performance is not a guide to future performance. Investors may not receive back the full amount originally invested and the value of investments, and the income from them, may fall as well as rise. No representation, warranty, express or implied, or undertaking is given or made as to the accuracy, reasonableness or completeness of the contents of this document or any opinions or projections expressed in this document. Investment markets and conditions can change rapidly and as such the views expressed should not be taken as statements of fact, nor relied upon when making investment decisions. Any views expressed within this report are our in house views as at 05 August 2014 and should not be relied upon as fact and could be proved wrong. The information contained in this document has been derived from sources which we consider to be reasonable and appropriate. This document may not be used, copied, quoted, circulated or otherwise disclosed (in whole or in part) for any other purpose without the prior written consent of Lloyds Bank Private Banking Limited. Lloyds Bank Private Banking Limited. Registered Office: 25 Gresham Street, London EC2V 7HN. Registered in England and Wales, no Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority under number WIO /14