The Global Month Ahead – An insight into November from 7IM

Financial News

We work closely with many leading fund managers. Seven Investment Management (7IM) have taken a look forward to see what lies ahead for equities both in the UK and overseas in the month of November.

United Kingdom – Fixed Income

Outlook Key Issues
The G20 of major advanced and emerging economies meets in South Korea during November. Currency imbalances may be the hot topic Most will hope the Chinese allow weak Renminbi to appreciate to make their exports more expensive and correct the trade deficit. No chance
Inflation remains above the Bank of England’s (BoE) target of 2%, and will continue to remain high after the VAT increase in the New Year The futures market does not expect a move in base rates until 2011.The BoE will be keen to keep rates low given the Spending Review cuts
The third quarter’s GDP was strong, but with the government spending cuts looming the BoE will be keen to supportive of growth Quantitative Easing (QE2) had appeared to be a done deal, but the strong GDP numbers have postponed it for now
Standard and Poor’s, the rating agency, revised its outlook for the UK from
negative to stable and reiterated its AAA rating on UK government debt
The possibility of a downgrade had concerned many as it would add to the UK interest bill. The Spending Review has addressed those concerns
The BoE’s inflation report is due out in November. The inflation forecast is for it to continue at a high level due to the impending VAT increase The forecast for GDP growth will be closely watched given the spending cuts that were announced in October, which were potentially deflationary

United Kingdom – Equities

Outlook Key Issue
Standard Chartered announced a surprise, fully underwritten, rights issue to raise £3.3Bn with the issue closing on the 5th November S&C does not require new capital, but would like a cast iron balance sheet. If other banks follow there could be share price weakness
The need for banks to have a stronger capital base was emphasised in a speech by Mervyn King, Governor of the BoE. Mr King does not propose a solution, but a part of the answer may be the more capital. Maybe S&C was right after all to tap the markets
Marc Boland, the new CEO of Marks & Spencer is due to announce in November the results of his review of the company’s operations Press leaks suggest the focus will be the food business, which is being overtaken by Waitrose. There may be greater focus on M&S own brands
The Co-op has retained Deutsche Bank to assist in the sale of its life assurance arm which has assets and liabilities of £18Bn This could be another step in the consolidation of the UK life assurance industry following the sale of Friends Provident and the UK Life arm of AXA, the Russian internet company, is seeking to raise about £600m in a London IPO. The company owns a 2.4% stake in Facebook It’s tough trying to value an internet company, never mind a Russian one, but there seems to good demand at present for such companies

North America

Outlook Key Issues
The mid-term elections are coming up, with the increasingly right wing Republicans looking to make major gains in Congress As the election gets closer trade protectionism is likely to rear its head to protect American jobs. This is an unwelcome development if it happens
The Bush tax cuts on higher and middle income earnings and dividends are due to expire in November, potentially dampening GDP growth With Congress and the President at loggerheads the best that can happen is that the cuts are rolled over for a year. This may help equity markets
The Federal Reserve Bank has been indicating that it might indulge in a second round of QE2 to boost the economy QE2 may come in November. The bond and equity markets have rallied in anticipation and may reverse sharply if QE2 is not actually executed
California will hold a referendum on Proposition 19 to allow the sale of marijuana to be regulated and taxed This is sure to be politically emotive, with polls so far divided. Taxing the sale of marijuana could lead to tax windfall at a time of deficits
The US and Canadian governments could float a part of their stake in General Motors after the mid-term elections The IPO could raise ~$8bn. The government stake could fall from 61% to 50%. Sales of more tranches to follow as the government stake falls to 0%
Apple has amassed a war chest of $51Bn for “strategic opportunities” Targets are being touted, including ARM plc, almost inevitably incorrectly.

Europe ex UK

Outlook Key Issues
The US, UK, Japan and many of the emerging markets want low currencies to boost their economies. The Swiss Franc and the Euro could rise This will not be welcomed in Europe as it could hit export industries and dampen growth. More expensive European holidays could also result
The surprise Standard Chartered rights issue has once again focused attention on the relatively weak European banking sector The Europeans have not grasped this nettle in the same way as the UK and USA. Banks may issue more paper and bank shares may be volatile
The ongoing bail out of basket case Anglo Irish Bank has led to subordinated bond holders being paid out only 20c on the Euro Controversially, tax payers and shareholders have carried the bank bail-out. Expect bond holders to start to take more of the burden now
The Russian government plans to sell stakes in 900 companies, including stakes in leading companies to raise US$ 59Bn to cover its budget deficit The Russians seem to be embracing capitalism by reducing state intervention, just as anti-business rhetoric is building in the West
Despite the pessimism about the economy, 79% of third quarter US company results and 72% of European results have beaten expectations “Positive earnings revision” is invariably an optimistic signal for the equity market, all else being equal

Other markets

Outlook Fixed Interest
Brazil & Thailand have put in capital controls in help stop the appreciation of their currencies and their resultant loss of export competitiveness Other emerging markets, like Korea, could follow them and put in place capital controls to prevent their exporters from losing competitiveness
China surprised the market by raising its deposit and lending rates in October by 0.25%. This is the first rise since 2007 This rise may be to slow local property prices and rising inflation. A stable Chinese economy is important for global growth, including the UK
The Singapore Stock Exchange launched a £5.3Bn bid for the Australian stock exchange in October Stock exchanges worldwide are merging to achieve IT savings to compete for business. The London Stock Exchange may be a target in this
China has become Volkswagen’s largest single market, both for cars made locally in China and for vehicles made in Germany and exported China is particularly profitable for the luxury car manufacturers like Audi, a part of VW, as wealthy Chinese like fully loaded, large limousines
Israel is to become a net exporter of natural gas as the Tamar field, the world’s largest discovery in 2009, and the Leviathan field come on stream This could see the Shekel start to climb as the trade balance improves. This will not be good for local exporters or for overseas holiday makers
Present Situation Next Meeting Expectation Source
Bank of England 0.5% 3 November QE2 still a possibility at this point Click here
US Federal Reserve 0% – 0.25% 2 November Possible start of QE2 Click here
European Central Bank 1.0% 4 November On hold for some while Click here

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

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