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

United Kingdom – Fixed Income

Outlook Key Issues
The IMF paper calls it “financial repression”. This is where the government channel savings to themselves cheaply that could go elsewhere. Base rates at 0.5%, gilts at 3% and inflation at 5% are a stealth tax on savers and pension funds that looks set to continue for some time to come.
The Monetary Policy Committee’s forecasts are for inflation to gradually rise through to the end of the year and then fall back to 2% by 2013. The Committee meets in early July to set the policy rate for the UK. The over-arching mood is that the economic recovery remains weak, making it difficult to hike the cost of borrowing; BoE Governor Mervyn King made it plain that raising rates could be catastrophic.
The new ESMA (European Securities and Markets Authority) definition of Money Market Funds will be adopted and only those which comply with its rules will be allowed to call themselves money market funds in future. Basel III rules on capital adequacy mean that banks may prioritise retail deposits/long-term funding over short term activities, the very part of the market that money market funds depend on.
The Debt Management Office has scheduled three auctions in July including a long conventional bond maturing in 2040 and an index-linked bond maturing in 2027. Recent supply of long dated gilts has already weighed on gilt yields and investors comforted by the passing of the Greek parliamentary vote are seeking riskier assets instead.

United Kingdom – Equities

Outlook Key Issues
The UK banks have to sell around £160Bn of debt secured on property by 2013, with about £50Bn already worthless and more to follow if rates rise. This will unfold slowly over the years ahead and act as a drag on the UK equity and property market and potentially on the banks ability to lend.
British Land want to raise nearly $500m by issuing bonds in a US private placement market as the group seeks to diversify its funding sources. High demand for privately placed bonds among US investors means pricing is attractive compared with rates available on bank debt.
Litigate Income Fund – a fund using a different approach to conventional litigation funding is planning to raise £100m on AIM. The recent increase in specialist legal funds has been an unforeseen result of stricter banking regulations – a rise in unconventional loan sources.
The deadline looms for the bid for Laird, the UK listed electrical components maker. The US industrial group Cooper Industries made an informal offer at the beginning of June and were given 5 weeks to formalise it. Laird rebuffed the initial offer of 185p and has since traded around 200p; speculation remains that Cooper Industries may come back with a sweetened offer.

North America

Outlook Key Issues
The US Treasury is still on track to run out of wiggle room to continue borrowing money as the agreement on increasing the debt ceiling appears no nearer a resolution. The White House seems as if it is leaving open the possibility of a short-term debt ceiling vote this Summer if lawmakers cannot reach a deal for deep spending cuts before the debt ceiling vote.
The July non-farm payrolls data will be important given disappointing U.S. fundamentals of late and will be used to answer questions as to whether QE2 has done enough (or, indeed, anything) to help the recovery. There is fresh state-by-state evidence that the slump is deepening. The risk is that the July numbers are to the downside; which may provoke an overblown and premature announcement of a recession in the US media.

QE2 ended on June 30th and the private sector, job creation, credit spreads and Treasury yields will now be closely watched.

QE2 will be seen as either a complete triumph or an utter failure. The truth is likely somewhere in between, and it is probably too early to tell.
Technology start-up culture and its future will be alive and well at the next round of the YCombinator funding programme event taking place over July and August. This launch-pad programme puts together start-ups with powerful investors and innovators as they attempt to turn embryonic ideas into full-fledged businesses – very much playing to the current appetite for tech.
On 4th July, the US celebrates Independence Day and President Obama’s eldest daughter Malia turns thirteen. A stuttering economy, high unemployment and a debt ceiling but President Obama faces his biggest challenge yet – a teenage daughter.

Europe ex UK

Outlook Key Issues
The Eurogroup meet on the 11th and should agree to formally give Greece its second rescue package in a year. Although Greece is small, a default would impact across more international boundaries than anyone is comfortable admitting.
Bankia and Banca Civica, two Spanish banking groups formed from local cajas, similar to building societies, could list in July to raise €5bn in total. The privatisation of the state lottery, plus the listing of Caixabank, may put pressure on the Bolsa as Spain SA seeks to strengthen its balance sheet.
The results of a second round of European bank stress tests are expected to be announced in early July. The major banks may be ok but regional German and Spanish banks may have issues, as too will the lesser French banks.
The European Central Bank meet on 7th July to set interest rates for the region. There is a strong chance that rates may go up from the current level on 1.25%.

Phillips Electronics releases its Q2 results on 18th July . Its loss-making TV business has already been sold, but further restructuring is expected.

Suffering from both the lack of consumer spending in Developed Markets, and being undercut by cheaper competition in Emerging Markets – unlikely to be a unique story.

Other markets

Outlook Key Issues
Arguably, one of the sources of the global slow patch in recent months has been the supply disruptions caused by the Japanese Tsunami. After a 3 month slump the markets will be closely watching Japanese industrial production and export data for signs of a strong revival.
When JP Morgan’s CEO asked the Fed Chairman if he had done an analysis of the impact of new bank regulation on credit availability, the Chairman replied “I can’t pretend that anybody really has… it’s just too complicated.” The desire to avoid another banking crisis has led to a blizzard of new banking regulation that even the Fed cannot track. The result is that banks may not lend much until they know the economic cost of regulation.
Japan is rated AA2/AA-/AA- by the 3 main rating agencies. A downgrade may be due soon due to large structural deficit and Tsunami rebuilding. Most major developed countries are at risk of a downgrade, excluding Germany. Who is the ugliest of them all, if not Japan – Italy maybe?
India’s monsoon continues in July but the India Meteorological Department (IMD) has recently forecast that the rains may be slightly below normal levels despite an above average first few weeks. The monsoon is crucial for India’s crop output and this raises concerns about the production of key summer-sown crops like rice, cotton, sugar cane, corn and lentils.
A Hong Kong land price bubble appears to be brewing. The property bubble is a function of the HK$ being pegged to the US$. As a result HK has inappropriately low US interest rates that feed the bubble.

Indicators

Present Situation Next Meeting Expectation Source
Bank of England 0.5% 6 & 7 July No change likely for a while Click here
US Federal Reserve 0% – 0.25% 9 August Low rates for a “prolonged period” Click here
European Central Bank 1.25% 7 July Strong chance that rates may go up 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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