The Global Month Ahead – An insight into January 2011 from 7IM

Financial News

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 Bank of England’s (BoE) inflation forecasts have been consistently too optimistic for the last 4 years and yet they keep interest rates very low. The BoE risks losing its inflation fighting credibility. The Bank could push up interest rates unexpectedly soon if inflation persists – or gilts could fall.
The Monetary Policy Committee (MPC) was split 3 ways again on interest rates, with one member voting for higher rates and one for more QE. MPC member, Paul Fisher, fears that the public do not appreciate that rates need to “normalise” at around 5%, a 10 fold increase in rates today!
For the first time in nearly 20 years UK manufacturing output is growing faster than UK services output, in part thanks to the low value of Sterling. This is exactly what is required if exports are going to help the UK reduce its dependence on the financial sector and grow back to prosperity.
November 2010 saw the first outflows from bond mutual funds for nearly 2 years. This coincided with a pretty sharp sell-off in bonds worldwide. This could be the start of a trend as the risks of a double dip seem to recede and as inflation starts to pick up worldwide.
Several professional forecasters are predicting 9% unemployment in the UK and below inflation wage growth as government cuts bite. With the risk of interest rate rises, lower disposable income and higher unemployment the outlook for house prices is pretty bleak in 2011.

United Kingdom – Equities

Outlook Key Issues
BP needs to sell ~$30bn of non-core assets to pay for the Gulf of Mexico oil spill. Agreement to sell assets in Pakistan was reached in December. BP has sold investments from all over the world. Next on the block may be BP’s North Sea assets or its Canadian gas fields.
Lloyds announced that it was writing a further 10% off its £27bn Irish loan book as the economic situation in Ireland deteriorates. British banks have large exposure to Ireland so it seems safe to assume that there will be further write offs, particularly at RBS.
Simon Property indicated a 425p preliminary indicative offer for Capital Shopping Centres plc (CSC), subject to due diligence The Takeover Panel has said Simon must announce a firm offer by the 12th January 2011. CSC management will want a higher price before they sell.
The uncertainty in the Ivory Coast has hit Randgold Resources plc, the gold miner that only opened its large new mine in the country in 2010 Fortunately, Randgold has other mines in Mali, Senegal and the Congo. Private investors should probably look for greater diversification though.
UK retailers may have had a good Christmas, but their New Year will depend upon whether they can pass on the increase in VAT or eat the rise themselves through lower profit margins and earnings. The government will hope that retailers will take the VAT increase rather than pass it on to the consumers through price increases and add to the inflationary pressures in the system.

North America

Outlook Key Issues
The deal that President Obama has struck with the Republicans to extend the Bush era tax cuts could boost growth expectations for 2011. President Obama will be keen to get unemployment down with 2012’s elections looming. The State of the Union address may show his intentions.
Non-farm payroll is perhaps the most watched statistic produced in the US. December’s statistic was disappointing growth of only 39,000 jobs. To push unemployment down the US needs to create about 250,000 jobs; with the recent strong economic data this may be possible.
It is January again and the leading US companies will start to report their results, starting with Alcoa, the aluminium products company. With 2010 behind us, markets will be reading earnings carefully for 2011 guidance. Growth of over 13% is expected in 2011 at present.
Fortune Brands, the US owner of Jim Beam bourbon, Courvoisier brandy, Moen faucets and Titleist golf products is to split itself up. There was little rationale for putting alcohol, taps and golf together. It is tough to see these 3 leading brands surviving as independent entities.
Several largish regional banks in the US have been taken over, such as Marshall & Ilsley of Wisconsin and Whitney Holdings in the Gulf region. As the economic recovery continues some of the regional banks clearly look cheap as they start attracting bids. This could continue into 2011.

Europe ex UK

Outlook Key Issues
Moody’s, the rating agency cut the rating of Hungary to close to junk as the government failed to take action to rein in its debt. The focus of the debt crisis has been Western Europe, but it could switch to Eastern Europe to countries like Hungary and Romania.
German consumer spending is growing robustly, which will help the Euro Zone grow out of its self-inflicted crisis in Greece, Ireland and others. A worry will be that the turmoil in the bond markets spills over into the “real economy”. If this happens it will be bad news for all of Europe.
Companies are continually under pressure to add value by simplifying their corporate structure and spinning off discrete businesses. Two new companies will soon be spun out. Fiat will split off its industrial from its auto business and Arcelor, the steel giant, will spin off its stainless steel business.
Santander, the Spanish bank, owns the old Abbey National and the best bits of Bradford & Bingley and Alliance & Leicester in the UK. Santander may seek to float off its UK bank to give investors a chance to buy into the UK business and to raise capital for the parent company.
Allied Irish Bank finally disappeared from the Irish Stock Exchange when the Irish government increased its stake to 92.8% of its total share capital so that it could meet its capital requirements. Although the European banking sector’s health is gradually improving there are still areas of weakness that need to be addressed such as the German and Spanish regional banks.

Other Markets

Outlook Key Issues
Some $250m was raised through the equity markets in new listings, but a near record $55m IPOs were cancelled due to poor market conditions. It can be difficult to predict the precise timing of new listings, but if markets are stable 2011 could be a bumper year for new listings.
The start of a new year inspires bravery in fund managers and there is often a marked “January effect” in the stock market. It is a fair bet that the “January effect” will lead to a rally in those stocks most beaten up in 2010. Look for value themes to outperform early in the year.
Japan is heading for negative growth in the 4th quarter of 2010 as government fiscal stimulus measures run their course. The Japanese government has promised much and delivered little. 2011 could be a very slow year for Japan unless the Central Bank gets serious.
China’s central bank raised interest rates on the 25th December by 0.25%, however rates remain below inflation. Inflationary pressures are building and the authorities will want to use all their tools to hold back lending before raising interest rates further.
The emerging markets need to lower inflation, but putting up interest rates tends to boost their currencies and hurts exports. Turkey’s response is to cut interest rates, but put restrictions on bank lending to cool inflation. If successful this could be repeated elsewhere.

Present Situation Next Meeting Expectation Source
Bank of England 0.5% 12 – 13 January Inflation up with VAT but no change in rates Click here
US Federal Reserve 0% – 0.25% 25 – 26 January QE2 has started and looks set to continue Click here
European Central Bank 1% 13 January Flat rates for the time being 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.

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