7IM Global Month Ahead December 2011

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 Chancellor of the Exchequer’s Autumn Statement was not expected to be a light-hearted comedy – an abundance of leaks beforehand established the likely tone – and it proved suitably bleak. The Office for Budget Responsibility cut its forecasts for GDP growth to 1.2% in 2012, 2% in 2013 and 2.3% from then onwards – culminating in a total economic output 3.5% lower in 2016 than previously predicted.
There were some well-telegraphed policy actions including improving credit conditions for Small and Medium Enterprises and increasing infrastructure investment. The real effect of the tightening will be felt in the public sector over the next 5 years – as a pay rise cap of 1% will be enforced from 2013, once the current pay freeze expires.
The imprecise nature of estimating economic data for an entire nation means that further fiscal revisions are probable, so neither the timescale nor the extent of the austerity is set in stone. At the moment fiscal concerns are secondary to monetary ones: with its independent central bank, the UK offers the markets a safer option than Germany and current bond yields are reflecting that fact.
The last day of November saw a co-ordinated intervention by the central banks of the USA, UK, Canada, Japan, Switzerland and the Eurozone. The joint action by the major global central banks signals both a willingness to act and the magnitude and severity of the current situation.

United Kingdom – Equities

Outlook Isses
Britvic, the UK juice company, looks to be focussing its expansion efforts on the US; doubling its presence from three states to six. It plans to lead with its child focussed product – Fruit Shoot. Whether by luck or judgement, Britvic is expanding into the right area at the right time with the right product. Aimed at children, inexpensive and sugary, Fruit Shoot is likely to be a success in the USA.
Rather unsurprisingly, the UK miner Antofagasta has run into a political stonewall in Baluchistan – a region in the South-West of Pakistan. The Reko Diq mine is a joint venture with the Canadian company Barrick Gold. As mining companies venture into wilder and wilder places, these disputes will become more common. For developing countries there are numerous incentives for denying access to resources; whether due to anti-West political reasons, the desire to use them themselves or to extort a large payoff from the mining companies. With the easily accessible minerals running out, exploration and development costs are only set to rise.

North America

Outlook Issues
Although the tradition of Black Friday weekend – when US citizens are encouraged to queue outside shopping centres from 4.00am – may seem ridiculous, 226 million shoppers spent an average of $398 each this year, according to the National Retail Foundation. Over the Thanksgiving weekend, sales increased by $7 billion on last year. When the world’s largest economy continues to spend money, there is bound to be a knock-on positive effect. It seems that the US consumer is still very eager to, well, consume – promising for sales in the next month.
The Conference Board’s Consumer Confidence Index seems to bear this out, increasing to 56.0 from 40.9 in October. Yet there seems to be a strong sense that this rise could be a temporary one – and that once the holiday period is over, data in Q1 2012 may well disappoint. The upswing in consumer confidence is likely to continue into December, fuelling strong Q4 GDP growth numbers – possibly as high as 3%. SocGen is worried though, because “much of the increase in consumer spending has been financed by dis-saving” – not sustainable income growth.
The “Super-Committee” failed to agree on a plan to cut $1.2 trillion from the US budget deficit over the next ten years; yet this has not measurably impacted markets in the short term – used to disappointment perhaps? The inconclusive outcome of the Committee will not have too much effect. The2% payroll tax-cuts implemented in 2010 are expected to be renewed in the mid-December legislation by Congress.

Europe

Outlook Issues
The two dates to watch out for in Europe this month are not Christmas Day and New Year’s Eve; instead you will want to be paying attention a lot earlier. On 8th December, the Governing Council of the ECB meets, and on the 9th the EU Heads of State hold their summit. As the Eurozone sovereign debt crisis continues, positive steps need to be made. However, there is a fear that the financial markets fail to comprehend the subtleties of the governments’ positions, and the governments do not properly understand the banks’ situations.

At the ECB meeting, expectations are that some action will be taken. Merrill Lynch believes that Draghi will “likely cut rates by 0.25%, expand liquidity procedures, and ease collateral requirements to help bank funding.” Action to support the bond markets, although arguably necessary, is only likely to occur following the Heads of State meeting.

Inflation rate projections look likely to fall along with reduced GDP growth; but quantitative easing is unlikely to happen in an overt form, given the German paranoia of inflation. The interest rate, currently at 1.25%, could be as low as 0.5% by February. The liquidity operations, often overlooked, may be expanded in order to prompt bank lending once more.
The EU Council meeting needs to demonstrate a progression from the nationalistic basis with which the crisis has so far been approached – steps towards integration and a common cause are what the markets want. Overcoming a national focus is difficult for an elected leader of a country – and any drastic moves towards fiscal centralisation would come as a huge surprise – a United States of Europe is still a long way off.

Other markets

Outlook Issues
In Japan, the bounce-back from the earthquake and tsunami has been tempered by the poor economic situation in the rest of the world – which is weakening export markets and creating financial turbulence. Nomura sees “little evidence of economic conditions deteriorating,” and the next few months should see continued slow growth. The Bank of Japan is likely to increase its QE programme within the next 2 months.
The end of 2011 is likely to be disappointing for India and China – and for those who are relying on the Asian powerhouses to “save the world” through rapid growth and subsequent investment. This may not be a bad thing – once developed, debt-laden governments realise that there is no Emerging Markets wand to wave, they can get on with fixing things. In China, real GDP growth is expected to ease to around 8.5% for Q4, down from 9.1%. Many have forgotten that this slowdown is part of the People’s Bank of China’s plan “for controlling inflation and sustainable growth in the long term.” India’s GDP growth decline may be less directed, as the high inflation level will continue to impact private consumption.
With the uncertainty in the world, those nations with surpluses are stocking up on gold. As long as the global situation remains unresolved, central bank purchases will continue – and the price of gold will rise. Russia’s share of total gold reserves is now approaching 9%, and the Central Bank of Russia has said “we are acquiring huge volumes…and not planning to step away from this path.” $2000/oz may not be far away.

Indicators

  Present Situation Next Meeting Expectation Source
Bank of England 0.5% 7 & 8 December

No action expected until the new year

Click here
US Federal Reserve 0% – 0.25%  13 December Low rates and no easing until 2013 Click here
European Central Bank 1.5%  8 December ECB could give a “Christmas Gift” if politicians look like doing the right thing: 0.25% rate cut & more liquidity funding 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.

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