The ‘soft patch’ in activity, taking place globally, is being caused by a combination of higher inflation and the dislocation caused by the Japanese earthquake. Companies have found that sales have slowed and their inventories have started to build up so they’ve had to cut production.
The Japanese earthquake means companies are finding that they can’t get the parts they need to increase production. We think the ‘soft patch’ is probably going to last through the summer, so the next couple of months will probably see a continued weakness in economic data....
Keith Wade – Chief Economist & Strategist di Schroders
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The recovery will begin when we start seeing improvement in demand, evidenced by sales picking up again. The key drivers of a pick-up in consumer spending will be oil price stabalisation and inflation falling back, which will help to support incomes.
The supply chain disruption will come to an end over the next couple of months as Japanese companies start to produce again, and start to provide the parts that companies need in order to resume roduction.
We are looking for a recovery in activity to commence as we move into the third quarter, with a confident bounce back in the fourth quarter.
”We believe that equity markets are the best place for investors to be at the moment.”
Defaults & spiralling debt: just another day in European government
Greece is really proving to be a much more intractable problem than initially thought. The reason why fears of a Greek default have come back is because it is has become apparent that Greece will not be able to raise funds from the market in 2012. Under the original bailout, Greece was meant to raise funding from the market in the second half of 2012, but it is clear that with two-year interest rates at over 20%, Greece won’t be able to afford the funding the market is willing to provide. It has become clear that Greece has got to go back to the International Monetary Fund (IMF) and the European Union to obtain more funds in order to see it through 2012 and into 2013.
We can see why Greece has got these problems, because it hasn’t made enough progress in reducing its debt; it is beginning to raise taxes, it is beginning to cut spending, but it is only doing it very slowly, and in the meantime the IMF has been through Greece’s accounts to find the situation is worse than they thought.
In the past when governments have successfully reduced debt levels they have done it against a backdrop of strong growth in the economy; so a buoyant consumer, a strong housing market, a healthy job market and rising tax revenue.
The problem the UK Government faces at the moment is that the economy has been fairly flat for the last six months.
Even though there are some signs that growth is coming back and some sectors are doing quite well, overall, it is not very strong and this is making it harder for it to hit its borrowing targets. We think they will stick to their plans, but it is quite possible that the overall level of borrowing turns out to be a bit higher than expected.
What does the end of QEII signal for markets?
QEII ends in June; will it have much effect? We don’t think it will have much effect on the economy because a lot of the money that the Fed has put in has remained in the banking system, the banks have not lent it and so there has been minimal impact.
Where it has had an effect is on the markets, it has helped to boost market confidence because it has signalled that the Fed is willing to do everything it can to support the recovery. The markets feel they are not on their own; that has been very positive, and it has put downward pressure on the dollar. The end of QEII could cause some volatility, temporarily, until the markets become convinced it is not going to have a significant effect on the economy. We think the dollar could be a bit firmer and the equity market might be a little bit weaker.
Where can investors find value right now?
We believe that equity markets are the best place for investors to be at the moment. Equity yields are quite high, earnings yields are attractive and as long as the ‘soft patch’ doesn’t turn into a double-dip, and ultimately a recession, then earnings will continue to grow and equities should deliver good returns.
The views and opinions contained herein are those of Azad Zangana, European economist, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. For professional investors and advisers only. This document is not suitable for retail clients. This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Schroders has expressed its own views and opinions in this document and these may change. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA, which is authorised and regulated by the Financial Services Authority. For your security, communications may be taped or monitored.
Source: IFAWorld – Schroders