The Global Month Ahead – An insight into March 2011

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
With inflation at 4% the Bank of England (BofE) is under pressure to raise rate despite the looming, anti-inflationary, government spending cuts The 0.5% was an emergency rate, but the Bank of England (BofE) could possibly raise rates as early as May to contain stubbornly high inflation
The Monetary Policy Committee (MPC) does not generally like to shock the economy about interest rises, preferring to warn with nods and winks in official statements, publications and the minutes of each MPC meeting There are ways that the BofE likes to wiggle its eyebrows, including speeches by members of the MPC. There are usually several speeches every month which will be closely watched for the direction of interest rates
The BofE is beginning to lose its inflation fighting credibility as real interest rates remain firmly negative and inflation continues to rise If financial markets do lose faith in the BofE, the cost of the national debt could spiral out of control leading to further spending cuts or tax rises
Regardless of the reason, UK longer term interest rates are picking up across the board quite markedly from their October lows The impact on households is mixed depending on circumstances; higher fixed mortgage rates for some, but boosting annuity rates for others
The Budget on the 23rd of March: borrowing is slightly less bad than expected which may give the government wiggle room for surprises There are bound to be one or two giveaways for the headlines, but savers and investors will hope that the austerity course is maintained

United Kingdom – Equities

Outlook Key Issues
William Morrison is considering entering apparel retailing and an on-line grocery store, partially in response to recent market share losses Morrison has only around 6% of its sales in non food areas compared with 15%-25% at its rivals. This is not blue sky thinking, but there is room for growth
BT is under “attack” from a number of places, including the pensions’ regulator, about its large deficit, and from Ofcom about its profitability Ofcom, the telecoms regulator, has suggested limiting BT’s “WACC” i.e. its profitability, which could be bad for its shares. Ofcom reports in March
Xchanging, the outsourcing company has seen its share price drop by 75% following the departure of its CEO and a series of large write downs The new FD, an accounting expert, should stabilise the finances, but the company is vulnerable with a narrow client base and further shocks
Barclays looks set to issue contingently convertible bonds (“Cocos”), a bond that pays a high rate of interest, but could convert into equity This follows an issue of Cocos by Lloyds a year ago. A neat way of raising new capital for banks in extremis that may become more common
Real wages in the UK fell in 2010, and may fall in 2011, due to low wage growth, rising inflation, tax increases and, potentially higher, interest rates With high street spending looking weak many of the domestic consumer stocks, such as the high street retailers, face a lacklustre near term future

North America

Outlook Key Issues
US non-farm payroll numbers are always closely watched to see how the economy is performing and the future direction of interest rates January and February non-farm payroll were weak, possibly hit by the weather. The March figures will be closely watched for a snap back
The Federal Bureau of Ocean Energy Management is close to awarding the first deepwater drilling permits in the Gulf of the post-Macondo era This will help the oil service stocks, which have performed poorly, and also help the US employment numbers along the Gulf Coast
All sides of the political divide agree that the $1.65Tn deficit this year has to be reduced, but there is no agreement at how The Greek deficit crisis caused a major hiccup last year. Every investor will be praying fervently that the US addresses its deficit before it is too late
The US Treasury may sell off some of its 92% stake in AIG in March as it seeks to exit the insurers’ shares, rescued during the financial crisis The profit of up to $17Bn the Treasury may earn is poor payback for the risky $180Bn put in, but probably worth it, preventing a deeper recession
Missed out on getting an iPad for Christmas? On 2nd March, Apple will be launching the iPad 2 with many new exciting features Apple believes the tablet market could be bigger than the PC market, which makes the launch very important to geeks and shareholders alike

Europe ex UK

Outlook Key Issues
The Eurozone is gradually moving towards a financial reform pact to address the present Greek/Irish crisis and prevent future crises The details are meant to be reported in March and may include closer economic integration as well as more cash for the European bail-out fund
Carrefour, the world’s second largest supermarket by sales, could spin out its property division as a separately quoted company worth €16bn The spin-off is in response to shareholder pressure and could help realise value, but at the loss of store flexibility, and of short term benefit only
The new Irish Government is committed to hitting investors in bank senior unsecured debt, supposedly safe debt, to help pay for its financial crisis This could impact us all, as UK and European banks are big holders of Irish debt. Any losses will hit bank capital and their ability to lend
Mobile roaming charges, the cost of moving calling from one network to another around Europe, is under attack from the European regulator Intra-EU roaming charges hinder the “single market” and may be reduced. Good for consumers, not so good for telecoms companies’ profits
Mario Draghi, Bank of Italy governor and presently favourite to be new Chairman of the ECB, has called on Italian banks to raise new capital soon With new stress tests in the Summer banks may act to raise new equity capital, tapping long suffering shareholders again for more funds

Other markets

Outlook Key Issues
China raised its interest rates for the second time in 6 weeks during February to 3%. Inflation, however, hit 4.9% in February and is rising The inflation problem is worrisome as China is a major locomotive of global growth. The People’s Congress in March will be closely watched
China’s real wages are also rising faster than its competitors at the rate of 12.6% a year through the noughties, making the country less competitive High inflation and high wages. These market forces may end China’s export-led economy in favour of a consumer-led economy, eventually
The Financial Times reports that some silver miners are worried about the silver price falling and are hedging against possible future price declines With silver at all time highs, hedging seems prudent for the miners if investors move into cash and out of speculative commodities like silver
Parents and grandparents will be dreading the launch of the new Nintendo 3DS, a 3D console that can be viewed without special glasses Nintendo’s profits have slipped as its existing line-up ages. 3D products have not been a huge success so far and this is not a certain winner
The problems in North Africa illustrate just how much we rely on relatively predictable oil prices and how combustible emerging markets remain It is surprising that investors are not more religious given the amount of praying they have to do. This time it will be that Libya’s problems do not spread


Present Situation Next Meeting Expectation Source
Bank of England 0.5% 9 & 10 March A change seems to be anticipated as early as May Click here
US Federal Reserve 0% – 0.25% 15 March QE2 looks set to continue to June 2011 Click here
European Central Bank 1% 3 March Flat rates for the time being, but inflation a big concern Click here

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