Economic and Market Overview; CHARLES NICHOLSON, a Director of Iain Nicholson Investment Management Reviews the World Situation

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Byline: CHARLES NICHOLSON

THE imminent risk to the world economy is of deflation and possibly a double dip which is likely to lead to further quantitative easing by central banks and the potential for inflation in the medium term.

The 20-year credit binge needs to be paid for and with national debt continuing to increase and consumers slowing, the resolution of the credit crisis is only being pushed into the future. A period of balance sheet repair for both governments and consumers will make growth, inflation and interest rate rises muted in the short term.

Equities are currently displaying some good value, in particular in the defensive area of the market. Wellmanaged, cash producing companies with good dividend yields and low price earnings ratios are beginning to show some strength as investors look to them for yield provision. There is likely to be increased merger and acquisition activity as a result of very low global interest rates and good quality businesses displaying good yields.

Countries, including China in particular, wish to have a depreciated currency to aid export. This competitive devaluation is not assisting world trade. It is to be hoped that adjustment of currencies will be achieved and any introduction of trade tariffs will be avoided.

The markets The US is likely to have to rely on a currency devaluation in order to erode their current and increasing level of debt. There are currently mixed economic messages coming from the US with the all-important housing market continuing to demonstrate weakness.

The US faces daunting challenges to rebalance its finances and the budget deficit is currently standing at approximately $1,342bn or 9.1% of GDP. President Obama has had a slower and more muted reaction to the current global credit/debt crisis. It is likely however that cost cutting will become inevitable.

The UK Sterling has had a strong summer rally versus the dollar and the euro in the wake of George Osborne's austerity budget. The need for economic stimulation through quantitative easing is likely to lead to a weaker pound in the future.

Corporate UK is one of the few attractive asset classes at present with many companies having strong balance sheets. In particular, large capitalisation companies are looking healthy and are well placed to engage in merger and acquisition.

The economic environment for the UK remains unattractive with the consumer continuing to drown in debt and national debt continuing to rise at a staggering rate. Consumer borrowing and mortgage approval has been very flat and for a consumer based economy this is likely to lead to poor growth. The imbalances in the economy remain and even with historically low interest rates, there is no revival in credit sensitive spending and home sales.

Europe Unemployment remains high and uneven across the region with the overall rate at 10% which is a 12-year high. It is very divergent amongst the countries within the Eurozone with Germany seeing a decline in unemployment for 14 months in a row to 7. …