The Global Month Ahead – An insight into November 2011

Financial News

7IM Global Month Ahead OctoberIn our regular feature Seven Investment Management (7IM) look forward to what the month ahead might hold for the world’s largest economies.

United Kingdom – Fixed Income

Outlook Issues
The Bank of England’s Monetary Policy Committee meets on 9 & 10 November and this month also sees the release of the BoE’s Quarterly Inflation Report. Markets had assumed that the MPC would use this to springboard a further round of QE; however Mervyn King and his merry men jumped the gun, and restarted the Asset Purchasing Programme in October. Further action would seem highly unlikely. It would be strange if the MPC took action only a month after the current round of QE started – for once, an interest rate rise and further easing look equally unlikely. Deutsche Bank believes that the next action by the MPC will not come until at least Feb 2012 – and is likely to be more monetary easing. In the Inflation Report, GDP growth forecasts are expected to fall slightly in the short-term – justifying the renewed stimulus.
Inflation is still likely to stay above 5% for October, as utility and commodity price hikes counterbalance slightly lower retail and petrol prices. The end of the year should see inflation slow gradually, although perhaps a little slower than the BoE would like. In January the VAT hike of 2010 falls out of the inflation figures; however, the effect may not be as pronounced as was first thought. Imported inflation, corporate attempts to increase margins and rises in wage expectations all present an upside risk.

The long end of the Gilt curve is should continue to flatten as the QE programme puts pressure on the supply of long-dated bonds.

Despite the recent rise in yields, anything approaching 3.00% looks unlikely – the combination of policy and fear should prevent those levels.

United Kingdom – Equities

Outlook Issues
Following the government’s plans to bring forward capital expenditure projects, BT has brought forward its 2015 plan to make superfast broadband available to the majority of UK households. BT has committed £300m to accelerate the rollout of commercial fibre-optic broadband which it had originally planned to reach the two-thirds of homes by 2015.
Barclays announced pre-tax profits for the first three quarters of the year jumped by 18%. This was in part due to its 31% reduction in Eurozone periphery debt to £8bn in the three months to September. It has lent £33bn so far this year, including £11bn to SMEs, putting it ahead of its project Merlin targets set by the government. The bank said it remained committed to achieving its June target of boosting revenue by 20% (£6.4 bn) by 2013 and also believed it was on course to raise core tier one capital ratio (a measure of balance sheet strength) to 11.2% by 2013, which is above the 10% expected requirement set out by the Vickers report.
G4S’s ambitions to become the world’s largest security and cleaning services company have been scuppered after it abandoned its £5.2bn takeover of Danish cleaning company ISS. The company called off the takeover following shareholders concerns “over its scale and perceived complexity against the backdrop of current macroeconomic uncertainty.”

North America

Outlook Issues
With 12 months to go, the US 2012 election looks as if it will be a close run thing – although possibly due to voter apathy rather than fervent support. Barack Obama has lost support from the youthful voters, and the Republicans still have no stand-out candidate. Election fever will be sweeping the USA once more – or in this case, dragged over an uninterested electorate as the political centre increasingly resembles no-man’s land. Observing how much interest is generated in the early days will be a useful bellwether.
MF Global filed for bankruptcy to become the largest US casualty of the Eurozone crisis after it had taken bets of $6.3bn on sovereign debt. MF Global’s debt was downgraded to ‘junk’ by Moody’s and S&P following an unexpected second quarter loss of $191.6m.
The Hewlett-Packard story continues to amaze – acquisitions, demergers, entire product ranges stopped dead, CEO hiring and firing – and it has taken another turn. New CEO Meg Whitman has reversed the most controversial decision of her predecessor, Leo Apotheker – the spin-off of the PC manufacturing division of the company. As the world’s biggest PC maker, the announcement of a separation caused a large decline in the share price –coming as it did before a purchaser had been found. Ms Whitman’s decision is likely to be well-received. However, HP’s PC division has a very small profit margin, and a future separation should not be counted out by any means.


Outlook Issues
It may be an indicator of just how much the situation has deteriorated that the October 27 pseudo-decision between the heads of the Eurozone had as big an impact as it did. German, French, Italian and Spanish equity markets all saw gains of 5%, the bond yields of Italy and Spain dropped considerably, and the Euro also rose. The outcome of the summit will be played out in the long-term – for instance the banks have until 30 June 2012 to recapitalise. Yet market reaction, as ever, will be in the short-term. It is likely that equity markets will remain volatile, as euphoria and despondency alternate, but the underlying trend may be slightly more positive than last quarter.
However, there are also indicators of how much work there is left to do, and how short-lived the sense of optimism might be. Italy held a 10-year issuance the day after the announcement – and paid the highest price since joining the Euro. Italy is fighting two battles: one is the same as the rest of the Eurozone; the other is against the increasingly poor leadership of Silvio Berlusconi. Whilst Berlusconi remains in power, markets will not place much confidence in Italy – regardless of the underlying economics.
The overwhelming theme for the next few months will be watching and waiting, in order to determine the commitment of individual members. As long as further political decisions are seen to be neutral to the solution, or even (whisper it) constructive, markets should keep the faith.

Other markets

Outlook Issues
Sony Ericsson has been a homogenous phrase for the past ten years; however, the rise of another combined word – smartphone – has forced a break between the Japanese and Swedish companies. Sony has purchased Ericsson’s stake in the joint venture for around $1 billion. Sony will be looking to become an “all-entertainment” provider – integrating its TV, stereo, computing and mobile technology under one brand. Ericsson will focus on growing its mobile network communications business – a lively sector in the current market.
Brazil is offering opportunities for those much-talked-about healthy corporate looking to spend some of their accumulated cash, particularly, it seems, if you make cars. Peugeot Citroën, Renault, VW, Fiat, Chery (a Chinese auto manufacturer) are all investing in building new factories. In addition to meeting demand, manufacturers are pre-empting a punitive tariff increase on imported vehicles. VW has planned for €3.4 billion over the next 5 years, with the rest not far behind, all for a grand total of around $19 billion by 2016. The reason is very simple – Brazil is not in a recession, the lower-to-middle income groups are increasing in wealth and it has a current ratio of one vehicle per 7 people. As EM discretionary spending averages creep up, expect to see similar expansion from other consumer sectors.


Present Situation Next Meeting Expectation Source
Bank of England 0.5% 9 & 10 November

Further action is very unlikely. The inflation report is due out on 16 November

Click here
US Federal Reserve 0% – 0.25% 2 November Low rates until 2013 following Operation Twist Click here
European Central Bank 1.5% 3 AND 17 November Whether the ECB takes action depends on the next few days Click here

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