Global Month Ahead by 7IM - January 2012In our regular feature Seven Investment Management (7IM) look forward and assess what the month ahead might hold for the world’s largest economies.

Whether you are invested in the UK or overseas, in stocks and shares or fixed interest assets, read on to discover the latest insights from one of the UK’s most respected investment managers.

United Kingdom

Outlook Issues
Given that it has been only two months since the Monetary Policy Committee (MPC) voted to extend its asset purchases, this month’s Bank of England meeting is likely to be a low key event. This means a significant discussion on whether to extend QE any further is unlikely to occur before May. Unless there is a sharp deterioration in incoming data, we are unlikely to see the MPC alter from its stance this month.
This is because the extension to QE is still ongoing – the Bank is still in the process of purchasing the assets. The Asset Purchase Programme is likely to keep a ceiling on Gilt yields for the next couple of months.
This meeting comes against a back drop of high unemployment (which has been at 8.4% since September) and falling inflation (which has been falling from its September peak of 5.2%). However, incoming data looks consistent with positive GDP growth and therefore lowering the prospects of a ‘technical recession’ (two consecutive quarters of negative growth).
The recent purchasing managers index (PMI) numbers for the construction and manufacturing sectors of the economy (rising to 52.1 from 51.2 and 56.7 from 54.3 respectively), suggested that both sectors expanded more rapidly than had previously been expected. We expect no changes to monetary policy in the UK unless we experience an unexpected shock to the system – such as a conflict in Iran hitting oil prices.

North America

Outlook Issues
The minutes of the March FOMC meeting will give an indication as to how the US policymakers view the current economic situation, and hence of likely action. We expect a dampening of expectations by the Fed, in order to prevent the markets from sounding the all-clear (and subsequently crashing if the good news wavers).
Fed Chairman Ben Bernanke has emphasised that the green shoots of growth are “still shoots”, and that the US central bank must “avoid complacency”. Consumer spending (a key driver of the US economy) is still weak as deleveraging of household balance sheets continues. The markets have recently been second-guessing the Fed policy of low rates until late-2014, but the (non-voting) Boston Fed President noted that if “if unemployment remains at its current unacceptably high level, monetary policy may need to be more accommodative…”
…and unless GDP growth begins to grow at more than 2.5%, the reductions in unemployment are likely to slow. Much of the recent hiring has been catch-up from the labour cuts made in 2009 – demand will need to increase in order to create more jobs. The Fed’s mandate is half focussed on employment, and half on inflation. With inflation benign at the moment, job creation, and hence economic growth, will take precedence. With that in mind, we see monetary policy remaining loose, and getting looser if growth slows.

Europe ex UK

Outlook Issues
The long-term refinancing operation (LTRO) conducted by the ECB in late February seems to have been a defining policy measure by Mario Draghi, the ECB president. So effective has the LTRO been, that this month’s ECB meeting will likely see the main rate remain at 1%, with no further ‘unconventional’ measures for the time being.
The stabilisation of jittery markets following the €1trln injection into the European banking system seems to have improved business climate conditions in Germany according to the IFO survey and has seen retail sales in France rebound sharply as confidence starts to return. The market forecasts further upward surprises to German economic data such as Manufacturing Orders, Industrial Production and Trade Surplus which should help boost confidence further across the Eurozone.
However, upcoming Greek elections, French elections in June, increasing concern surrounding the Spanish banking sector and ongoing austerity all provide material risks to the fragile Eurozone. One of these events “going bad” is manageable – any severe combination will likely prompt the ECB to lower its main rate and into further unconventional measures such as an additional LTRO.

Other markets

Outlook Issues
China’s purchasing managers’ index – a closely watched gauge of economic activity – achieved the impossible in March. Analysts had been predicting a drastic slowdown in growth, but the index rose to its highest in a year. This could be the first sign that the gradual loosening of monetary policy in China may be having some impact. Clearly no-one told Chinese factory managers about the ‘hard landing’ they were supposed to be having. However, with turmoil and uncertainty in the ruling Politburo Standing Committee, China could well be governed by politics as opposed to economics, at least for the next few months.
The Japanese stock market had its best first quarter for 24 years, as a weaker Yen helped exports. The Bank of Japan will be watching the currency closely, and any sign of sustained strengthening will probably see a further bout of monetary stimulus.

Indicators

Present Situation Next Meeting Expectation Source
Bank of England 0.5% 4 & 5 April No action due to easing announced in February Click here
US Federal Reserve 0% – 0.25% 24 April No action while the economic situation keeps improving Click here
European Central Bank 1.5% 4 April No change in rates, unlikely to see any change in unconventional forms of easing either Click here

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

Before considering investments we recommend that you consult your advisor who can assess your personal circumstances and objectives.

For more information call 0207 760 8777 or visit www.7im.co.uk

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