The Global Month Ahead – An insight into September 2012

Posted on September 4th, 2012 | Categories - Financial News

7IM The Global Month Ahead - An insight from Seven Investment ManagementIn 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.

We’d love to hear your thoughts, why not leave your comments at the end of the blog?

United Kingdom

Issues Outlook
The United Kingdom economy is likely to come under increased focus once the Paralympic Games finish – indeed Chancellor George Osborne is already the subject of some scrutiny in the media. Mr Osborne has announced the formation of a government backed Bank solely to provide lending to small businesses. These kinds of measures reflect public sentiment, and are likely to be positive influences on the economy. However any improvement is likely to be gradual, not a jump-start of GDP growth. Unfortunately, media attention will demand immediate results and Mr Osborne will face mounting pressure to take more radical and perhaps inadvisable action.
The Bank of England’s Monetary Policy Committee meets on 6 September, and is unlikely to take any action – either on interest rates or asset purchases. One potential catalyst for further easing could be a drastic appreciation of Sterling against the Euro, with the Pound up over 3.5% in 2012. However, August has been a quiet month for economic news, and with the previous round of asset purchases only beginning in July, the MPC will wait until at least October to see the result.

North America

Issues Outlook
In the minutes for the July US Federal Reserve (“the Fed”) meeting, “many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.” In previous Month Ahead outlooks, we have mentioned that the September meeting could well be the Federal Reserve’s last chance to ease before the move is seen as overtly political (in support of Obama) by the US population. With the election race so finely balanced, the September meeting is a now-or-never moment for Chairman Bernanke.
In terms of the policy action that the Fed might take, again the minutes are helpful: “Many members expressed support for extending the Committee’s forward guidance, but they agreed to defer a decision on this matter until the September meeting.”

The likelihood is that the policy could be a further commitment to keep the interest rate at historic lows, possibly until 2015 – although positive US housing data could serve as the indicator that the policymakers cite to delay the next round of easing.

Europe ex UK

Issues Outlook
The European Central Bank (“the ECB”) meeting this week has the most potential to move the markets, however some outcomes have already been largely telegraphed. The following are all expected to be addressed: bond purchases, European Stability Mechanism activation, more collateral flexibility and lower interest rates. If the ECB fails to adequately deliver on any one of these, disappointed markets may lead to substantial downside. However, President Draghi is aware of market sentiment and whilst he respects the power of investors, he will not be pressured into hasty actions.
ECB President Mario Draghi wrote an article at the end of August in the German magazine Die Zeit, entitled “The Future of the Euro: stability through change.” In the article, he sets out his (and we can presume the ECB’s) view of what is necessary to ensure a stable Euro. The final passages seem to be an effort to prepare the German public for the possibility that money printing could happen, should it be deemed necessary: “fulfilling our mandate sometimes requires us to go beyond standard monetary policy tools (and use) exceptional measures…What we need is a gradual and structured effort to complete European Monetary Union… we know this is what the people in Europe, and in Germany, aspire to.”

Other markets

Issues Outlook
The Shanghai Stock Exchange Composite Index has reached its lowest point since the end of January 2009, as Chinese corporations struggle to come to terms with a slower world. The fall in the Chinese stock market is likely to continue – Chinese companies are finding that their rapid rise has been founded on the false premise that new sales will keep growing and growing. With the rest of the world stagnant, the markets are disappearing, taking corporate profits with them.
Australia has prided itself on being one of the only developed nations to avoid the three major crashes – the Asian financial crisis in 1997, the tech boom in 2000 and the credit crunch in 2008. Since 2008, the Aussie Dollar has appreciated by nearly 40% against the US Dollar. It may not be this month, or even this year, but eventually eyes are going to turn to Australia. Supplying China with raw commodities has been a good strategy for the last 15 years – but as the Eastern powerhouse slows, profit margins will begin shrinking. On top of this external demand dependency, Australia has a rising debt-to income ratio, and a property boom. Sound familiar?

Indicators

Present Situation Next Meeting Expectation Source
Bank of England 0.5% 5 & 6 September No action until November, although pressure is mounting as the economy continues to struggle. Click here
US Federal Reserve 0% – 0.25% 12 & 13 September Last chance to ease before the election, and if the ECB eases, the Fed may well follow suit. Click here
European Central Bank 1.5% 6 September Markets are expecting significant action from Draghi – so there is scope for disappointment if he believes the time is not right. Click here

Seven Investment ManagementThe views expressed in this document are for information only and do not constitute investment advice.

Before considering investments we recommend that you consult your adviser who can assess your personal circumstances and objectives.

For more information call 0207 760 8777 or visit www.7im.co.uk

Seven Investment Management Limited is authorised and regulated by the Financial Services Authority. Member of the London Stock Exchange.

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