Global Month Ahead by 7IM - January 2012In 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 Purchasing Managers Indices (PMIs) were better than expected in December; in the all-important service sector (which makes up more than 70% of the UK economy) the index was at a 5-month high. The Services PMI rose to 54.0 from 52.1 in November and the Manufacturing PMI rose from 47.7 to 49.6 and the Construction PMI rose to 53.2 from 52.3. The PMI is a forward-looking indicator and, taking the numbers with a pinch of salt, we can at least say that the UK economy does not look like having an appalling decline in January. However, Deutsche Bank believe that house prices still have a way to fall, which would suggest a poor start to the year for the Construction sector. 
The December CPI Inflation figure is due on January 17th, and it should see the continuation of the downwards trend – forecasts are for around 4.6%. As the VAT rise passes out of the CPI inflation calculations, the number should decline steadily throughout 2012, as long as no drastic supply shocks occur – Iran closing the Straits of Hormuz for instance.
The Bank of England’s Monetary Policy Committee is unlikely to vote for more Quantitative Easing this month as there is still £20bn of assets to purchase from October’s programme. Although the PMI figures are encouraging, the outlook for the UK economy remains gloomy – particularly with the uncertainty in Europe – and the MPC will be looking to stimulate growth in the next few months.

United Kingdom – Equities

Outlook Issues
The beginning of January can be a tough time for UK food retailers, as their Christmas sales figures are released. Tesco, Morrison’s, J Sainsbury and Marks and Spencer are all due in the week of the 9th January. Tesco is widely xpected to report its worst festive season performance in years. Christmas 2011 looks to have been tough for the large supermarkets, which performed well despite the snow last year. As consumers continue to feel the pinch of austerity and low wage growth in 2012, supermarkets will have to cut prices to attract custom – profit margins will shrink.
However, despite poor performance, Wm Morrison is looking to explore areas other than just food, as it expands its Kiddicare brand. The supermarket chain is looking to buy and then convert11 retail sites being vacated by Carphone Warehouse subsidiary Best Buy. The Best Buy stores are located in retail parks, and will enable Morrison’s to give Kiddicare a physical presence, as most of its current business is internet based. Wm Morrision is also rumoured to be interested in acquiring Iceland Food – further expanding its footprint.
Interactive TV is here to stay. Audiences have been Tweeting and “live blogging” along to TV shows for a couple of years now, and Zeebox is a tech start-up looking to capitalise on the growing market. Zeebox’s apps offer a “live” TV guide interwoven with Twitter and Facebook updates from subscribers. With BSkyB taking a 10% stake in the company, expect to see Zeebox becoming a fixture onscreen.

North America

Outlook Issues
The pace of growth in the US service sector quickened in December. The Institute of Supply Management (ISM) said that the service sector component of its PMI figure rose to 52.6 from 52.0 in November. This followed the ISM Manufacturing PMI rise from 52.7 to 53.9. With the expectation that the US economy is approaching a sustainable recovery, we think the Fed will refrain from initiating any further asset purchases for the time being. With economic data improving, the meeting on the 25th January is not likely to see any action being taken.
The December employment report showed that there was a 200k increase in non-farm payrolls. The report also showed the labour participation fell from 63.9% to 63.8%, which is now at a 27-year low. All of this has seen the unemployment rate fall to 8.5% from 8.6% which is a three-year low. There are several positives to take from the employment report. The 200k increase in December was the sixth consecutive rise of more than 100k – a number that is usually indicative of a gradual fall in the unemployment rate; January’s unemployment number should be similar at around 8.5%.
The Consumer Electronics Show is held every January in Las Vegas, and is a major opportunity for both companies and consumers to get a feel for the new technology in the forthcoming year. This year, affordability and sustainability are featuring more heavily than ever before.  Tablet computers are the new craze, but the company One Laptop Per Child is embracing the technology in a new way – developing “a low-cost, low-power, rugged tablet…for classrooms around the globe” that can be powered by solar energy, or by hand cranks.

Europe

Outlook Issues
Unemployment in France is likely to rise to over 10% in Q1 of 2012, and with the French presidential election in May, job creation is going to be the hot topic for President Nicolas Sarkozy in the upcoming talks between Germany and France. France is expected to push for measures making it easier for workers to move from one country to another. With the German unemployment rate at 6.8%, and likely to fall further, it would seem that Germany’s priorities are somewhat different to France. However, with more than a third of German companies reporting a shortage of skilled labour, a relaxation of regulations governing labour transition may well be on the cards.
Belgium became the first country obligated to change its budget – cutting €1bn for 2012 – under the new EU rules. In the early years of the Euro, these rules were almost universally broken without punishment. In November, the other EU countries listed as in breach of the rules were Poland, Malta, Cyprus and Hungary. This month it is likely that Hungary will be face fines of around 0.2% of GDP, unless it acts immediately.
The new BMW 3 Series is launching worldwide at the beginning of February, and will be heavily focussed on the US market, where the 3 Series debuts at the North American International Auto Show this month. BMW will be looking to capitalise on its strong performance in 2011 – selling 1.67 million vehicles – and is confidently aiming to remain the world’s leading premium car manufacturer in 2012.

Other markets

Outlook Issues
China saw its first domestic default of an AAA-rated bond at the start of January, when the steel producer Angang failed to repay its Rmb5bn loan by the deadline. As China’s financial system increases in complexity, strains and stresses will become more apparent, particularly if GDP growth begins to falter – expect more defaults during the first quarter of 2012. The corporate bond market increased in size by 52% last year as the Chinese authorities sought to spread credit risk away from bank loans. There are particular worries about credit in the manufacturing sector. As China’s financial system increases in complexity, strains and stresses will become more apparent, particularly if GDP growth begins to falter.
India’s Prime Minister Manmohan Singh has cut his growth forecast for 2012 to 7% of GDP, on the back of high inflation, political paralysis and numerous corruption scandals. With Legislative Assembly elections at the very end of this month, the political situation in India is fragile – with many voters suffering from the effects of inflation and seeking to blame politicians, change could come.
As the US and EU draw closer to a complete ban on Iranian oil imports, Iran continues to threaten closing the Strait of Hormuz. Western commitment to maintaining the free flow of oil suggests that should Iran try to close the Strait, military action will follow.

Indicators

  Present Situation Next Meeting Expectation Source
Bank of England 0.5% 11 & 12 January  Unlikely to see any more QE until January Click here
US Federal Reserve 0% – 0.25%  25 & 26 January  No action unless the situation changes Click here
European Central Bank 1.5%  12 January  Possibly another 0.25% rate cut  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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