Global Economic Update

The major Western Economies face the prospect of either inflation or deflation due to the impact of low growth, authority, quantitative easing and low interest rates. Major policy holders such as the Federal Reserve, the European Central Bank and the Bank of England appear oblivious to the risk of inflation and have indicated that they may well start up the printing presses again in order to stimulate the economy. The Bank of Japan has followed suit and has also embarked on a significant bout of quantitative easing in order to bring the value of the Yen down and support it’s manufacturers.

This is an unusual situation in that all of the major economies are printing money at the same time. As such, the impact of inflation has not been a significant as we have expected, nor has the QE had an undue affect on an individual countries exchange rate as all the key players are effectively devaluing their currencies at the same time. However, we believe that the impacts of QE are likely to be more prominent over the next couple of years as the money filters through the system.

Under the current environment we therefore believe that it would be sensible to invest in hard assets and gold which are both natural hedges against inflation. Strong companies are also holding onto cash reserves as there limited investment opportunities in the markets and bonds and equities are particularly risky under the current environment. The likelihood of business failures are high and hence there may be opportunities for takeovers in the near future.

China has not had the hard landing many critics had feared. The economy has slowed but there are signs that it may pick up in 2013. Given that the Western economies are particularly risky at this time, businesses and investors are looking to emerging markets for growth. The US is likely to fare better than the UK and Europe due to its strong manufacturing base and the possibility of cheap energy provided by new fracking techniques to extract natural gas from rock fromations. There have already been signs that the US housing market has been picking up although the prospect of the fiscal cliff in 2013 poses a significant risk at this time. Businesses would be advised to wait until early 2013 before embarking on any major projects if they are dependant on the US.