The Global Month Ahead – An insight into September 2011

01/09/11
Financial News

In 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 (BoE) released its Inflation Report on 10th August, containing its long term predictions for growth and inflation. In addition, the minutes from the August MPC meeting revealed that fiscal tightening is off the cards for the time being – with none of the nine members voting in favour of raising interest rates – even the hawkish Martin Weale. UK GDP growth was 0.2% in the second quarter, in line with predictions. The Inflation Report projection is that it will be Q3 2012 before GDP growth recovers to its pre-recession peak. CPI inflation is expected to remain above the 2% target until the beginning of 2013 – while at the same time, bond yields are flirting with alltime lows.
Although not strictly UK Fixed Income, Ben Bernanke’s eagerly awaited Jackson Hole speech has disappointed global markets with its lack of definitive action – the much talked about QE3 was nowhere to be seen. Mr Bernanke’s speech confirms the MPC’s view that the outlook for the global economy has deteriorated. The speech also highlighted the problem of long-term unemployment in the US – another BoE theme.

United Kingdom – Equities

Outlook Issues

Boodles, the luxury jeweller, is set to open its first venture outside of the British Isles; a concession in a Hong Kong department store.

The growth of the luxury goods market in Asia – China especially – will continue to entice British and European high-end retailers.
Manchester United Football Club is expanding into Asia in a big way. A three year deal with Beeline, a Vietnamese telecoms group, one in the pipeline with a Malaysian snack food company, and finally an IPO on the Singapore Exchange – valuing the club at over $3 billion. The Red Devils have had a huge fan base in Asia for some years, thanks to increased TV coverage of the 19-times champions. It seems that the US-based owners, the Glazer family, are trying to cash in on the popular support – selling replica kits just isn’t cutting it any more.
The security company G4S is the largest private employer in Europe, with 625,000 staff across 125 countries. However, it is looking to grow further, by  capitalising on the desire for a single global security provider. G4S intends to boost the proportion of its sales drawn from the emerging markets to 50% by 2018. The security arrangements for Brazil’s hosting of the 2014 World Cup and the 2016 Olympic Games are a likely target.
Sir Martin Sorrell’s advertising group WPP made a 37% increase on profits this half-year, and it believes the situation remains positive for advertising. WPP relies on big events – the Olympics, European Championships, US elections etc – and these will be held even in the worst of times.

North America

Outlook Issues
Steve Jobs has resigned as CEO of Apple due to his continuing ill health. He will remain as chairman, and still be involved at a strategic level; but consumers worry whether the level of innovation can continue. A lot of attention will be focussed on the new CEO Tim Cook – in the next few months, we will begin to see whether Apple’s “game changing” success was based on the vision and drive of Jobs alone.
Google’s purchase of Motorola Mobility has created another battle in the war for smartphone supremacy. Vertical integration of hardware and software seems to be the next stage in assaulting Apple’s position. The outcome of Google’s surprise acquisition will be interesting to watch. The move may well turn most of Google’s Android customer base – HTC, Samsung etc – into direct competitors, possibly to Google’s detriment.
HP seems to be changing its entire business focus, pulling its tablet and its smartphone off the market. In addition, the largest PC manufacturer in the world is looking to stop making PCs – keep an eye out for a buyer. With the purchase of Autonomy, the UK enterprise software company, HP looks set to follow IBM into the enterprise and data management sector – leaving the real world, and heading to the vaunted “cloud computing”.
Deep-discount chain stores seem to be attracting a lot of attention at the moment – 99 Cents Only Stores has set a bidding deadline for mid-September for private equity rivals Apollo and Leonard Green. As the economic climate deteriorates, more consumers turn to discount stores for their subsistence needs – making them a fantastic counter-cyclical investment. Warren Buffet has just invested $48 million.

Europe ex UK

Outlook Issues
By the start of September, the legal outline for expanding the European Financial Stability Fund should have been drawn up, with parliamentary approval by individual Eurozone members to come later in September. Continued support for bailouts is likely to be unproblematic in most countries –with the notable exceptions of Finland, Germany and the Netherlands. All are expected to pass the motion, but with a struggle.
Dominic Strauss-Kahn, former head of the IMF and one-time French Presidential favourite, has been cleared of all charges of criminal assault in New York, leaving him free to return to France and the political arena. “Where there’s a will, there’s a way” is a saying that Strauss-Kahn will be testing to destruction should he choose to enter politics once more – his economic and political cachet may not be enough to carry the day.
Volkswagen is going to unveil its new single-seater zero-emission car during the first week of September. VW is also marking its territory in the electric car sector – with a 2013 release of an electric version of the Golf. VW has the ambition to become the world’s largest car manufacturer by 2018, overtaking Toyota and GM. In order to achieve this, the German company will be looking to make more unconventional decisions.
Job losses in the banking sector are occurring as predicted. As economic conditions continue to deteriorate, further actions may be taken. Swiss banks are under pressure as the Swiss Franc continues to appreciate – UBS has hinted that there may be more cost reductions to come.
The fifth-biggest airline in Europe, Air Berlin, is likely to shrink in the next few months, focussing its efforts on four main airports. The German airline suffered from growing too fast, but its new CEO is making changes. Hit by a German air-passenger tax and higher oil prices, Air Berlin’s margins have been getting slimmer. However, it could reap benefits from joining oneworld, the British Airways cross-selling alliance.

Other markets

Outlook Issues
On 26 August, Japanese Prime Minister Naoto Kan resigned, paving the way for a sixth Prime Minister in five years. Strong leadership has been noticeably absent in Japan since Junichiro Koizumi stepped down in 2006. The three main contenders are Seiji Maehara, Yoshihiko Noda and Banri Kaieda. However, although Mr Maehara would be a popular choice, the result will swing on internal politics in the Democratic Party of Japan.
The Japanese beer market is becoming something of an escalating arms race, as the largest players seek overseas expansion on the back of cheap credit and a strong Yen. The acquisition spree should continue. As Japan’s population ages and shrinks, the large brewers such as Kirin and Asahi have to adapt – opportunities for growth lie in EM countries with large populations, but limited technology and product distribution.
Emerging markets – China and India especially are becoming another location in the apparently all-encompassing struggle for smartphone domination. Apple, Samsung and Nokia are all releasing lower-end, mass market versions of their most recent models. In China factories have been successfully churning out “pirated” versions of smartphones; the big producers, having seen the opportunity, want in on the action. The pared-down, “premium” brand models will be priced in the $200 range, appealing to young, image-conscious consumers.

Indicators

Present Situation Next Meeting Expectation Source
Bank of England 0.5% 7 & 8 September

More QE on the horizon?

Click here
US Federal Reserve 0% – 0.25% 20 September No change to mid 2013 Click here
European Central Bank 1.5% 8 September No change Click here

The views expressed in this document are for information only and do not constitute investment advice.

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