In our regular feature Seven Investment Management (7IM) look forward to what the month ahead might hold.

With the effects of the Japanese earthquake still being felt on the world’s stock markets and the spectre of a prolonged conflict in Libya what will April hold for world markets?

United Kingdom – Fixed Income

Outlook Key Issues
The UK has some relatively good fundamentals in that the government is addressing its large deficit in contrast to the situation in the US and Japan. The 28,000 rise in unemployment in March, with public sector cuts to come, will test the government’s resolve and may cause gilt weakness.
The tax and prices inflation index is at over 5%pa thanks to the VAT increases, whereas wage growth is only at 2.3%pa, a fall in real incomes of 3%pa, and suggestive of why the government policy may be unpopular. The nation as a whole is feeling the pinch. This suggests that retail price pressure may fall due to weak demand. This is potentially good for gilts and Sterling, but only if the government holds its course.
After the latest Inflation Report from the Bank of England it seemed highly likely that interest rates would move up as early as May. The Q1 2011 GDP data release in April will be closely watched for evidence of a rebound in the economy; if not rates may stay at 0.5% for longer.
The Budget showed a slight deterioration in the UK’s long term debt position due to growth forecasts, and tax revenues, being revised down. This bought a swift warning from S&P the ratings agency about the UK’s AAA status. The April IMF Stability Report may bring further warnings.
The UK housing market continues its gentle downward path, despite the support from extraordinarily low interest rates. When rates do finally start to rise the rate of decline may accelerate, maybe hurting the real economy, tax revenues and the price of UK fixed income.

United Kingdom – Equities

Outlook Key Issues
The FSA is due to issue its report on the failure of RBS. The conclusion “no wrongdoing” will not meet the populist demand for blood. One of the main pieces in RBS’ collapse was the takeover of ABN-AMRO. Poor business decisions are not illegal, despite the popular media rants.
The FSA will also report on its role in allowing the ABN-AMRO take-over, which denuded RBS of cash and capital going into the banking crisis. The new regulator, the Bank of England, will have to strike a balance between tight regulation, restricting loan availability, and excess risk.
The Vickers’ Commission on banking reform may make an interim report in April. A separation of retail and investment banking is a possibility. The UK banks will howl in protest, not without justification, as their investment banks did not cause the financial crisis.
Topaz Energy and Marine, a Dubai based oil services company seeks a London IPO next month that could value the company at $1.7Bn. Topaz is quoted as saying that Middle East political instability is not a threat because most of its business is offshore. Try telling that to BP!
BP’s proposed link up with Russian state owned Rosneft to develop Arctic gas fields is being blocked by BP’s existing Russian partners TNK-BP. BP must agree a deal by mid April. BP was harassed out of control of TNK-BP, now they are being held to ransom by its management over Rosneft.

North America

Outlook Key Issues
The Federal Reserve suggests that the US economy is finally picking up, but is ready if the Japan Tsunami crisis hits growth and job creation. Fortunately, the US economy seems to be performing well and it is likely that QE2 will be allowed to lapse in June, not extended.
The Federal Reserve Chairman, Ben Bernanke, will start in April to give regular press conferences to explain US interest rate and monetary policy. Central bankers like to be enigmatic to keep their options open. It will be interesting to see how much more light Bernanke sheds on US policy.
US new home sales fell to the lowest level on record in February, due in part to a large overhang of repossessed homes on the market Not many homes are sold in the snow, so a seasonal pick up is expected in March. However, low sales will continue as the housing bubble deflates.
Deutsche Telecom plans to merge its sub-optimal US mobile business with AT&T using the UK merger of Orange and T-Mobile as a blue print. Fewer competitors generally leads to less competition and higher profits. Good for investors, but bad for consumers if regulatory approval is given.
The Apple iPhone 5 may be launched anytime between now and perhaps June. Apple will want to generate as much advance buzz as possible. And we will do our part to add to that buzz… The iPhone is very profitable (gross margins of ~50%). A successful launch is essential to its stock price.

Europe ex UK

Outlook Key Issues
European Central Bank (ECB) governor, Jean-Claude Trichet warned that the ECB has “strong vigilance” on inflation suggesting a rate rise soon. In the past the “strong vigilance” term has been used to warn that interest rates will rise very soon. Possibly in the first few days of April.
Germany, with its competitive exporters, is booming and inflationary pressures are setting in. Greece, Ireland and others are not booming. Germany is ok, but the rest of Europe cannot absorb a rate rise alongside their austerity measures. Tensions look set to continue in the Eurozone.
The European ministers reached a predictable compromise agreement to patch up the European Stability fund, but not a long term solution such as the rescheduling of Greek, Irish and, maybe, Portuguese debt. Ultimately, the EU core will pay and the peripheral Eurozone countries give up some national sovereignty. This is not seen as politically palatable and will remain an issue until the next Euro crisis.
The nationalist True Finn party are expected to make substantial headway in the Finnish elections on 17th April, capitalising on the EU difficulties. European party leaders are under domestic political pressure not to pay for other nations’ lax spending. Another reason to fudge a final solution.
Portugal’s government has fallen thanks to a proposed austerity package. The Portuguese president, Senor Silva, may call elections for early June. Markets hate uncertainty. Portugal has €5Bn of debt to refinance in April alone, which may prove to be difficult without ECB help.

Other markets

Outlook Key Issues
Glencore, one of the largest commodity traders in the world, are planning a possible IPO with an estimated valuation of $60Bn to $80Bn. Some clarity on plans may be forthcoming in the month ahead. These savvy traders are selling. Does this point to a peak in commodities?
The Japan Fukushima nuclear crisis has caused the world to take a deep breath regarding its planned expansion of nuclear energy. So much for decreasing our carbon emissions. More fossil fuels could equate to higher oil prices and more power to Middle Eastern despots.
The Fukushima crisis may inhibit the growth of the nuclear industry and boost alternatives such as coal and natural gas, as well as oil. The coal market is already tight, with prices up about 75% since 2008. The natural gas market however is in surplus thanks to new technology.
Despite the crises in Libya and Japan and rising commodity prices the equity markets had a great end to March, rising sharply. We have not yet seen the full impact of the Tsunami, but manufacturing in the US and Europe has been hit, suggesting lower EPS and share prices.
The IMF Stability Report is due out in April. Banking instability is being addressed, but sovereign risks abound, not just in Libya and Syria. Perhaps the biggest sovereign risks come from AAA countries like the US, which are running enormous deficits which have not yet been addressed.

Indicators

Present Situation Next Meeting Expectation Source
Bank of England 0.5% A change seems to be anticipated as early as May Click here
US Federal Reserve 0% – 0.25% QE2 looks set to continue to June 2011 Click here
European Central Bank 1% Flat rates for the time being, but inflation a big concern Click here

The views expressed in this document are for information only and do not constitute investment advice.

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