The Global Month Ahead – An insight into May 2013

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 preliminary estimate of first quarter GDP growth in the UK was better than expected at 0.3% (although with two further revisions, and an entire rethinking of the GDP calculation in June, perhaps not all that meaningful). A positive GDP number gives breathing space for UK policymakers. The Bank of England will probably announce some minor adjustments to credit conditions in order to help increase loans to small companies, but make no changes to significant monetary measures.
A forward looking indicator, the manufacturing PMI, is nearly into expansion territory at 49.8 (above 50 indicates expansion). Of particular note was the pick-up in new orders from abroad, at its highest since July 2011. While the UK is, and will continue to be, primarily a service-based economy, the manufacturing industry has been actively detracting from growth in the past few years. A pick-up in exports will clearly be necessary to revitalise the UK, but given that the UK’s principal trading partner is recession hit Europe, we may start to see an increase in trade with other nations, perhaps India and China.

North America

Issues Outlook
The US economy showed some signs of slowing in April, with weaker jobs and productivity numbers on top of a contraction in manufacturing due to defence spending cuts. US GDP growth was 2.5% for Q1. Given that the spending cuts from sequestration were well publicised, a slowdown in the growth rate should probably have come as less of a surprise – analysts had forecast 3%. Looking forward, the increase in US house prices over the past year may eventually prompt people to start spending again. However the wealth effect will take some time to feed through – the data for the next couple of months could be weak, until consumer spending picks up again.
The strong first quarter of 2013 prompted the US Federal Reserve to begin making noises about curtailing its easing program. This changed in April – and expansion was also mentioned. A lot of the Fed’s monetary impact comes from managing expectations and instilling confidence – talk is cheap. While markets are worried, expect soothing words to mask a lack of real action ($85 billion a month in purchases is already happening!).

Europe ex UK

Issues Outlook
In the May meeting of the ECB Governing Council, the decision was taken to cut the main interest rate to 0.5%. There is growing public pressure within the Eurozone calling for measures to support growth to be implemented alongside austerity programs to cut debt. Low inflation in the Eurozone looks to be more persistent than suspected, which gives the ECB leeway to start outright monetary easing, should it desire. However it seems likely that Germany’s fear of inflation’s impact will prevent any money printing in the near future. Instead we could see even more unconventional measures used by Mario Draghi – the securitisation of small-business loans may well be popular with investors, providing yield in this time of low bond rates.
In April, we mentioned that the successor to Georgio Napolitano as Italian President would have a difficult job – the last thing we expected was that the 87 year old would be given another 7 year term. Italy now has two leaders – Prime Minister Enrico Letta of the centre-left party is forming a coalition with former PM Mario Monti, and the centre-right party led by Silvio Berlusconi. This coalition is likely to end up being very similar to having no government at all, no bad thing in our view, as most previous austerity measures will remain in place.

Other markets

Issues Outlook
One month into the quantitative easing programme and the Governor of the Bank of Japan, Haruhiko Kuroda, will be feeling satisfied – the Yen has depreciated and Japanese equity markets have continued to rise. Having done that rarest of things and exceeded expectations about monetary policy, the BoJ now has some breathing space – growth and inflation forecasts have increased significantly. We expect token policy announcements based around reaffirmation of policy and ongoing monitoring, but no further surprises from the BoJ in May.
There are rumblings surrounding China’s closely controlled currency, the Renminbi, which can currently only trade in a 1% range around a price fixed by the central bank. The People’s Bank of China is unlikely to suddenly let the Renminbi become a free-floating currency – the trading band was only increased to 1% this time last year – but we could see another hike, perhaps a 2% trading range.


Present Situation Next Meeting Expectation Source
Bank of England 0.5% 9 May No action, growth figures may just be picking up Click here
US Federal Reserve 0% – 0.25% 18 & 19 June No action unless May data is extremely poor Click here
European Central Bank 0.75% 6 June No change, due to rate cut in May Click here

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