7IM Global Month Ahead OctoberIn 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 next Monetary Policy Committee meeting takes place on the 5th and 6th October. The minutes of the September meeting suggest very strongly that a policy change could be imminent; “a continuation of the conditions seen over the past month would probably be sufficient to justify an expansion of the asset purchase programme at a subsequent meeting.” More simply, a second round of quantitative easing (QE2) looks likely. At the start of 2011, markets were pricing in an interest rate rise during the Autumn – in order to control high inflation. Now however, fears over uninspiring economic data have pushed the MPC in the other direction.

The Bank of England’s chief economist Spencer Dale has predicted that inflation will peak at somewhere around 5% this Winter, but will then fall very sharply in 2012. This statement seems like part of the MPC’s attempt to assuage fears over the prospect of more QE, and its potential effect on inflation. However, once the VAT rise is taken out of the equation from January next year, inflation should subside – particularly if commodity prices remain fairly stable (quite a large supposition). In the meantime, with the cold season approaching, UK families are likely to have incomes squeezed even more as fuel prices rise.

Short of a dramatic turnaround in growth statistics, expect to see £50 billion entering the UK system before the end of the year. If the QE is used to purchase government bonds, yields could stay low for a long time; especially in conjunction with the ongoing Eurozone crisis.

United Kingdom – Equities

Outlook Issues
Burberry has been the golden child of the UK fashion industry ever since 2008. The British brand has seen a 900% share price gain, powered by Chinese appetite for luxury. However, fears over poor growth prospects in China has seen shares decline by 25% since July. Luxury brands have been extraordinarily successful since the 2008 crisis, as the newly wealthy in the BRIC nations have sought out Western haut-couture. However, Burberry’s decline could presage a drop off in similar companies – LVMH, Hermès, Tiffany, etc. – with heavy EM exposure.
Over the next two and a half years, seven UK rail franchises become available – and so the key train operators are looking for ways to make their bids more attractive. It’s almost a given that none of the operators will use lower fares as part of their pitch – instead focussing on making train stations more attractive and useful places to be around, hence attracting more customers.
The UK Alternative Investment Market is likely to see more joiners than leavers this October, continuing September’s trend. In Q3, 24 companies joined AIM, whilst only 21 left – the best figures since 2007, although the average value of each new IPO has dropped by 20%. The Quoted Companies Alliance has just begun a confidence survey for SME’s. Small and Medium Enterprise (SME) sentiment is negative on the outlook for the UK economy, and sceptical over government proposals to reduce red tape. However, although there is a feeling that they are on their own, the new survey reveals a wave of optimism about the next 12 months – companies are looking to grow and create employment.

North America

Outlook Issues
The Federal Open Market Committee meeting does not meet until November 1st. However, any drastic action seems unlikely. As long as conditions stay similar over the next month, the Fed will give “Operation Twist” time to play out – no change is expected for a while.
Hewlett-Packard continues to baffle everyone. Léo Apotheker has been replaced as CEO after just 10 months in the job. His replacement, Meg Whitman, has little experience in leading an enterprise-focussed business. HP’s abrupt change of strategy last month was masterminded by the outgoing CEO. It remains to be seen whether Ms Whitman will reverse the move, attempt to limit the damage, or change the game again…
Tesla Motors has taken the next step in its attempt to become the first pure electric car manufacturer, as it reveals its Model S sedan. The 6000 Model S vehicles expected to be produced next year have already been pre-purchased, with annual production expected to be 20,000 by 2013. Elon Musk, Tesla’s CEO released a statement saying “We are trying to change the industry, and I think we have.” With performance comparable to a high-spec traditionally powered car, this statement might not be too far off the mark – this could be the push that the larger companies need.
Yahoo is being viewed as a potential takeover prospect by the Chinese internet group Alibaba – its founder, Jack Ma, has expressed an interest in purchasing the US group outright. A Chinese purchase of such a large US interest would be controversial to say the least – in 2010, the US Congress vehemently opposed a Chinese company (Huawei) even becoming a supplier to a US telecoms firm.

Europe

Outlook Issues
The next €8 billion tranche of Greece’s bailout was originally scheduled to be paid in September. Now however, it seems that the “troika” composed of the IMF, ECB and EU governments will not be releasing the funds until late October at the earliest. Greece will officially run out of money on the 10th October, but should be able to juggle its obligations to creditors in order to survive until Halloween. With the financial crisis in the Eurozone grabbing all of the headlines at the moment, even the near future is clouded at best. The slipping of deadlines certainly sends mixed messages – does this signal an unwillingness on the part of Greece to comply with the loan terms, a tacit commitment by the “troika” to avoid default, a very basic “kicking the can” exercise, or something else entirely?
Over the last two weeks, European banks such as Commerzbank, BNP Paribas and Société Générale have seen intraday share price movements of as much as 15%. The price chart of the EuroStoxx 50 index is beginning to look like a row of shark’s teeth, and trading volumes have also diminished. The European equity markets are being driven by headlines at the moment (even more so than usual). As long as fears over slowing economies and sovereign defaults continue, investors will continue leaping in and out of shares. Volatility will remain high, particularly in the banking sector, due to its exposure to “risky” sovereign debt.

Other markets

Outlook Issues
According to UN population projections, on October 31st 2011, Planet Earth will gain its seven billionth human inhabitant. Obviously, the day is merely symbolic – but it serves as a nice point to prompt discussion on how to tackle the challenges of a growing world.
China’s economic ascendancy continues, as the government owned Commercial Aircraft Corporation of China (Comac) attempts to break the stranglehold that Boeing and Airbus have on aircraft manufacturing. Comac is starting small – with a 90-seater jet that does not compete directly with the two big players. However, China’s aircraft industry is forecast to be worth around $600 billion by 2030 – Comac won’t miss out.
The UBS trading scandal has caused interest in Asia, where the Swiss group has the largest presence by a considerable margin – in both wealth management and investment banking. If Swiss regulators require UBS to reduce global risk, buyers will be queuing up for the Asian franchise. UBS has total assets of SFr162 billion in Asia, and the wealth management market in the area is predicted to grow at a rate of around 11%. In addition, it has almost no trading restrictions in China – a huge acquisition incentive for a Western bank such as Barclays Capital.
The Qatari sovereign wealth fund has agreed to finance European Goldfields for its upcoming development of two Greek gold mines. The predictions for the gold mines estimate an annual production rate of 350,000 ounces of gold – the largest in Europe.

Indicators

Present Situation Next Meeting Expectation Source
Bank of England 0.5% 5 & 6 October

Slim chance of further QE – unlikely though

Click here
US Federal Reserve 0% – 0.25% 1 & 2 November Low rates until 2013 following Operation Twist Click here
European Central Bank 1.5% 6 October No change expected – but it is Trichet’s last meeting…. 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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