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Italian Election Looms

Jack Turner, Research Analyst

This week covers the upcoming Italian elections, market data, three key news updates out of the UK, EU and China, and provides an overview of the asset allocation process the investment team are about to undertake.

4 March sees the Italian election take place, with the 5Star Movement predicted to become the largest party. However, the polls have ruled out enough of a win for the party to rule on its own. Meanwhile, all the other parties have rejected the idea of a coalition with the anti-establishment camp. Instead, there could be centre-right coalition led by Silvio Berlusconi, whose Forza Italia could join with the Northern League and the Brothers of Italy to form a slender working majority if they get the 35-38% that’s been predicted. The last poll, however, was published on 16 February as under Italian law, no opinion polls can be published in the last two weeks of an election campaign.


NEWS

UK UPDATE
The second estimate of UK GDP for Q4 2017 saw the growth rate for the UK cut by 0.1% from the first estimate to end at 0.4% rather than the 0.5% previously published by the Office for National Statistics (ONS). The revision was due to slower growth in production industries. This means that 2017 growth came in at 1.7% versus the 1.8% previously estimated. The ONS also stated that household spending grew by 1.8% in 2017, the slowest annual rate since 2012 given consumers faced higher prices as inflation rose throughout the year while wages failed to keep pace.

EU UPDATE
Minutes made available from the European Central Bank’s January monetary policy meeting revealed that its committee is concerned about the Euro’s strength versus the US Dollar’s weakness. As a result, they are considering a change in the Bank’s communications and are arguing that economic conditions are now strong enough to drop previous commitments to boost quantitative easing in the event of a slowdown. However, there is still reluctance to change the monetary policy and begin tightening, even though inflation is coming through at a stronger pace than previously predicted.

CHINA UPDATE
Xi Jinping has surprised rivals shortly into his second term in office through the announcement by the Chinese Communist Party that an abolition of the two-term limit on presidential tenures is being proposed. In a move that is widely expected to take place given Xi’s popularity within China, international investors, however, are likely to be perturbed by the move which, if the estimates current circulating are correct, will have Xi in his 80s before he aims to give up power. At the age of 64, Xi is still a young country premier by China’s standards, but the obvious ambition to make his mark and ensure that his name sits alongside Mao Zedong and Deng Xiaoping could jar given his heavy hand on the economy.


PORTFOLIO ACTIONS
The team has begun its formal quarterly tactical asset allocation process to determine whether the portfolios need to be revised based on current market conditions and economic expectations. The process starts with a review of all the main regions of the world, looking at economic and political developments that could impact asset returns over the next three to twelvemonths. The team then draws up a set of forward looking scenarios that are presented to the Asset Allocation Committee, which consists of the 7IM investment team and external representatives, who provide expert insight into economics, financial markets and politics. The team then assess the probability for each scenario, and then overlay these probabilities onto forecasted returns to produce the targeted returns for each asset class.


THREE ANNOUNCEMENTS DUE THIS WEEK
01 Mar –UK Manufacturing PMI (Feb) // 01 Mar –US Personal Spending (Jan) // 01 Mar –EU Unemployment Rate (Jan)

SOURCES: BLOOMBERG; ONS, REUTERS; 7IM.

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