In our regular feature Seven Investment Management (7IM) look forward to what the month ahead might hold for the world’s largest economies.

United Kingdom – Fixed Income

Outlook Issues
The Bank of England releases the quarterly Inflation Report on 10 August. The MPC will have made its interest rate decision a week beforehand; anything other than rates staying at 0.5% would be a complete surprise, particularly given the subdued Q2 GDP growth figures of 0.2%. UK Gilt yields have been falling steadily, whilst the yields on US Treasury bonds have been increasing across the curve. Fears over Europe’s sovereign crisis and the US deficit may well cause investors to continue seeking safe havens away from the traditional Bunds and UST’s. Keep an eye on the fixed income spreads.
Although inflation dropped slightly in May relative to April, it still remains at 4.2% year-on-year; over double the inflation target of 2%. Inflation is above 4%, and GDP growth is (generously) annualised to 1%. The MPC can (we hope) do the maths as well as everyone else – a rate rise is unlikely. Poor GDP data in the UK? Flee to the US! The Republicans and the Democrats won’t stop arguing like petulant children? Quick, the Germans know how to behave like adults! Wait, they have to babysit the Greeks, Italians, Spanish, Portuguese and Irish? Maybe the UK figures weren’t so bad after all…

United Kingdom – Equities

Outlook Issues
The Hut is a UK e-commerce company, launched in 2004; a £300 million IPO looks imminent. Selling multiple products on multiple websites, The Hut Group is one of the fastest growing digital companies in Europe. The Hut focuses on fast-moving, non-perishable consumer goods and premium brand names. With the current enthusiasm for tech investments, The Hut could be looking to become the Amazon of the new decade.
Punch Taverns is to split into two – the managed estate (Spirit) and the debt laden tenanted pubs business (Punch). A ‘parting of ways’ after a heavy but worthwhile night, or two drunks propping each other up?
Clinton Cards has an annual rent bill topping £80 million. Its £55 million credit revolving facility was supposed to be refinanced on July 31st, but has been delayed until September. Full year profit forecasts are down 80%. Supermarkets and online companies like Moonpig have chipped away at Clinton’s market share. The greetings card franchise could be going the way of the music industry – comparisons are being drawn with HMV.
Lloyds Banking Group is selling off 630 branches in order to comply with EU state aid rules; and the competition is growing fierce. The purchaser of the portfolio will find themselves running the sixth largest bank in the UK. Co-operative Financial Services and NBNK have been joined in the bidding by Sun Capital’s Hugh Osmond (once the owner of the aforementioned Punch Taverns). The price is expected to be around £2 billion.

North America

Outlook Issues
With the US political situation becoming more dichotomised with every emergency meeting, the chances of resolving the debt ceiling seem to be revised every day. On the 2nd August, if an agreement is not reached, the US will fail its first creditor payment. Regardless of whether it all gets sorted, market panic could be enough to trigger a credit downgrade. The possibility of resolving the fiscal problem in the USA seems to be constantly on the horizon. More importantly, it is staying on the horizon, unreachable. A temporary extension is like jumping from one sinking ship to another – eventually, you run out of ships. The fear factor could cause a negative re-rating of US Treasuries; the beginning of a vicious circle?
Google’s latest venture into social media is gathering momentum; Google+ is experiencing its field testing. Whether the search engine can break Facebook’s stranglehold on the market remains to be seen. Creating a complete product and dropping it in to the market has been unsuccessful. Growing Google+ slowly and organically may be a better solution – Google’s potential resource base offers a lot of opportunities.
The battle for supremacy in the smartphone world is heating up. Samsung is due to launch its flagship Android OS-based SGSII in America this August, and Apple’s iPhone 5 is eagerly expected in September. The king is dead…Long live the king. But which king? Nokia has been the number one smartphone maker in the world for 15 years. With its reign looking almost over, the identity of its successor remains uncertain.

Europe ex UK

Outlook Issues
The ECB is due to make its interest rate decision on the 4th August – no change has been signalled by Jean-Claude Trichet. The ECB Governing Council’s job increasingly resembles  that of someone trying to herd cats, as Eurozone economies become more disparate.
RWE may well be looking to sell Npower in the near future. The German utility company is looking to unload €8bn of its €27.5bn net debt by 2013.

With the German government implying an uncertain future of nuclear power, RWE will not be the only energy company looking to restructure.

Siemens released its Q3 (Q2 to the rest of the world) views this week. The German electrical and engineering hinted that it was close to signing a large (and lucrative) railway contract with the Russian government. The CEO, Peter Losche emphasised that the Emerging Markets were still a key growth area to focus on – highlighting healthcare and diagnostics as two sectors with large potential for upside.
European banks are recalibrating. UBS is downsizing its investment arm, with thousands of other cuts across the group. Credit Suisse is following suit, with a 4% reduction in global headcount. Other banks like Deutsche Bank are likely to undergo similar changes. Following the crisis most banks engaged in a spate of hiring. Some of this was to replace the staff laid off during 2008, the rest was to capitalise on the recovery. Now that the recovery has not materialised as hoped (which was a touch optimistic), cost cutting measures are back on the table.

Other markets

Outlook Issues
Bright Food Group is a Chinese food and beverage company, rumoured to be interested in acquiring ex-Foster’s business, Treasury Wine Estates. TWE’s heritage dates back to 1844 with Lindeman’s Vineyard and Penfolds. The growing Chinese middle-classes seem to equate prosperity with Western luxuries – and that includes Western wine snobberies. Chinese wine (for the moment) won’t do, and so BFG may seize the opportunity.
Japanese companies should see an improvement – Toyota is looking to rehire 4000 contract workers, and industrial production has increased. The Japanese bounce-back has been strong. However summer heat, power failures and political deadlock mean a far from easy road ahead.
China owes Iran over $20 billion for oil imports. However, due to US financial sanctions, the money cannot reach Iran. China and Iran’s bilateral trade increased by 40% in 2010, so Beijing is looking to use a barter system to balance the trade – investing in Iranian companies and ventures. China purchases just under a third of Iran’s oil output. If Beijing can find an acceptable way to pay Tehran, the effectiveness of US sanctions would be greatly reduced. China may still be wary of upsetting the US, but equally the Dragon runs on oil, and must be kept fuelled somehow.
The outlook for gold is good – as the US Dollar falls, gold tends to rise. Given the fragile state of the world, the precious metal looks promising, with some analysts forecasting a further 15% upside to the already impressive $1627 an ounce – August could see the world get bling. If you were able, buying a gold mine wouldn’t be a bad thing at present – you’d have seen around a 25% profit since mid-January and prices keep rising. Better still, if something goes so badly wrong that even gold loses its allure; you’ll have a nice deep hole to hide in.

Indicators

Present Situation Next Meeting Expectation Source
Bank of England 0.5% 3 & 4 August

No change likely for a while. Inflation Report due on 10 August

Click here
US Federal Reserve 0% – 0.25% 9 August Low rates for a “prolonged period” Click here
European Central Bank 1.5% 4 August No changes expected until at least September 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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Registered office: 125 Old Broad Street, London EC2N 1AR. Registered in England and Wales number 4092911.

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