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
The Bank of England’s Monetary Policy Committee is unlikely to take any action in its March meeting, either on the interest rate or the Asset Purchase Programme. The MPC is likely to remain in wait-and-see mode this month, judging the effect as February’s £50bn of gilt purchases flow into the system.
The market expectation of an interest rate rise keeps being pushed out as growth and inflation remain weak. The Base Rate looks like staying at 0.5% until late 2013, barring any unexpected shocks to these two main catalysts. A key indicator from the March MPC meeting will be the breakdown of the Committee votes – particularly whether Adam Posen and David Miles are joined by any other members in their endorsement of further easing as soon as possible, which would indicate a rise in growth fears.
CPI inflation data for February is released on 20th March; consensus estimates a figure of around 3.3% y-o-y. The VAT rise and the Arab Spring last year both increased prices, but are now dropping out of the calculations.
The 2012 Budget is released on 21 March – a £7.8bn surplus in January has pulled national debts below £1trn. However the extra cash is not likely to be used, as wanted by many, to implement a further tax cut on fuel prices.

North America

Outlook Issues
For the United States to maintain its recovery, the key driver of growth over the next year is going to be consumer spending. This means that any meaningful reduction in disposable income could hinder the current economic growth. Currently, WTI Crude Oil is trading at $109 per barrel, and gasoline is around $3.70 a gallon. The relationship between the price of crude oil and the price of gasoline (petrol) in the US tends to be that a $10 increase in the price of crude oil means a $0.25 increase in the price of gasoline, a $25bn reduction in personal consumption and a -0.2% impact on real GDP growth. Oil above $125 and gasoline above $4 are the danger levels.
The potential of an unstable Middle East to unsettle the oil price will not be overlooked by the US government – however in an election year, President Obama has much to consider. The US will be monitoring both Iran and Syria very carefully – with Israel’s interests at stake too. However, Obama has public perception to consider; part of his first-term campaign was bringing troops back from abroad.
March is likely to see a decline in new orders across the board in the States. Much of Q4 2011 growth came on the back of inventory build up – as this is unwound, new orders will fall.

Europe ex UK

Outlook Issues
The European Central Bank will only undertake explicit Quantitative Easing when it appears that without it, the Euro area will disintegrate. As we finish February 2012, it seems that a break up scenario is markedly less likely than it seemed in November 2011. As we said last month, the more progress is made on shoring up Europe, the less interest the press will show – the lack of scrutiny in turn making it even easier to take positive steps. This rare example of a virtuous circle will slowly restore confidence, barring any shocks.
The June French presidential election campaign has some potential to shake things up – Francois Hollande has been threatening to hold a referendum on Franco-German agreements, and Sarkozy may be forced to utter something similarly foolish in order to save face. It’s unlikely that either presidential candidate believes France will truly leave the Euro, but political brinkmanship could lead to over-promising on the campaign trail – leaving an ugly mess to sort out if elected, potentially slowing down the recovery.
Oil price rises could damage real income growth through increasing inflation, which could in turn lower demand. Without domestic demand, and the associated increase in spending, a German (European) recovery could falter.

Other markets

Outlook Issues
Venezuela’s President Hugo Chávez is back in Cuba, ostensibly undergoing further treatment for colon cancer. The socialist Mr Chávez visited doctors in Havana in the Summer of 2011 for treatment of the same illness. Venezuela currently gives $5 billion to Cuba every year – the equivalent of a quarter of Cuban GDP – the loss of which could cause a severe recession, in addition to destabilising Cuba. The US will be watching closely.
Elsewhere in Central America, the US has just agreed a deal with the Mexican government that gives oil companies from both countries the right to drill in the Gulf of Mexico, along a previously disputed borderline. As mentioned above, the US has an interest in sourcing more oil domestically or on neighbourly terms. Mexico is likely to increase its investment into new gas and oil extraction techniques to meet domestic and US demand.
Last week, a Chinese car company called Great Wall opened a car assembly plant in Bulgaria; the minimum wage is the lowest in the EU, comparable to that of coastal China, but with better market access. This outsourcing to cheaper and more tax-efficient labour markets is a reversal of the past three decades – and as corporate China becomes more sophisticated, more Chinese companies will be looking abroad.

Indicators

Present Situation Next Meeting Expectation Source
Bank of England 0.5% 8 & 9 March No action due to easing announced in February Click here
US Federal Reserve 0% – 0.25% 13 March No action until the economic situation clearly shows signs of deteriorating Click here
European Central Bank 1.5% 8 March 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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Registered office: 125 Old Broad Street, London EC2N 1AR. Registered in England and Wales number 4092911.

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