In 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.
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|The UK economy is in pretty healthy shape. GDP growth in Q1 was confirmed at an annual 3.1% rate. Inflation remains low, but stable. Consumer confidence is growing, retail sales are rising, and even business investment is picking up.||Any wobbles in UK growth are going to be caused by external factors. A prolonged slowdown in the US combined with one in Europe would eventually feed through to the domestic economy here. However, for the minute, the UK should continue to grow, and by the end of Q2, may well be back to 2008 levels of output.|
|A sign of the smooth-running economy in the UK has been the media focus on the victory of UKIP in the European elections – creating a crisis out of nothing.||The media headlines have been focussing on select facts, rather than all of the data. Although UKIP won the election, voter turnout was around 30% – the European elections are still viewed as a non-event in the UK. UKIP’s banner will be waved high over the summer, but they are unlikely to be able to sustain the momentum into 2015.|
|Last month we said that for the US, it seemed that Q1 “GDP Growth of 0.1% was still not awful enough to disrupt markets significantly.” The second estimate of Q1 2014 GDP was negative 1%; a significant contraction by anyone’s standards.||A couple of years ago, bad news was good news; poor economic data implied further support from the Federal Reserve, and risky assets rallied. With tapering beginning in earnest, this is no longer the case. Instead, it seems that bad news is just ignored – the S&P 500 is at its all time high. Look for good news to be leapt on, and bad news to be swept under the rug over the next month. Janet Yellen is unlikely to take any action on June 18th, but markets will need some evidence of economic strength in the US by the end of the summer.|
|Volatility is at all time lows – the VIX index is at all time lows.||When something hits its all time low, some degree of mean reversion is to be expected – the VIX may well move higher over the next couple of months. Hopefully this will be a gentle rise, but geopolitical shocks are always a risk in quiet market conditions.|
Europe ex UK
|The ECB meeting on 5 June is perhaps the most eagerly anticipated since Mr Draghi took office in November 2011.||ECB meetings seem to be like a rollover in the lottery – if no action is taken, even more is expected next month. Since July 2012, Mr Draghi has been taken at his word, that if required he will take action; “and believe me, it will be enough.” Now may be the time where reality has to meet expectations.|
|The consensus is for, at minimum, a cut in the interest rate. There is also more than a whiff of desire for a quantitative easing programme of some kind.||There is a real possibility that Mr Draghi’s announcement will disappoint investors in the short term. A large scale Quantitative
Easing (QE) programme still seems to be too politically difficult to implement, and the “unconventional measures” may not initially satisfy the markets – the impact of the LTRO programme implemented in 2011 went unappreciated for nearly 6 months.
|India has elected its new Prime Minister, Narendra Modi, on the back of his focus on economic growth.||As leader of the largest democracy on Earth, Mr Modi has a real mandate for change. However, India is a sprawling nation with a host of languages, regions and ethnicities – and Mr Modi is likely to discover that politics is about more than economic growth (having said that, China has proved for half a century that growth can outweigh a multitude of other failings). Mr Modi may not be able to get to work as quickly as he’d like, but for the first time in a generation, an Indian political party has both a parliamentary majority and a mandate for change.|
|Present Situation||Next Meeting||Expectation||Source|
|Bank of England||0.5%||5 June||No change in interest rates||Click here|
|US Federal Reserve||0% – 0.25%||18 June||No action on interest rates or tapering||Click here|
|European Central Bank||0.5%||5 June||Interest rate cut probable, but no real chance of genuine QE||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 adviser who can assess your personal circumstances and objectives.
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