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Investment Notes

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All three of the major credit rating agencies, Standard & Poor’s, Moody’s and Fitch, have the UK rated at AAA but with a negative outlook. A fourth, Dagong, a Chinese-owned rating agency, already has the UK at only A+, four notches below AAA.

Germany, the powerhouse economy of the Eurozone, recently announced 2012 GDP growth of only 0.5%, and that it expected 2013 to deliver only 0.4% growth. At a time when most of rest of the Eurozone is undergoing policies of austerity and reductions in private sector wage costs, they are looking to Germany to be the source of demand for their goods and services, which their own economies are currently unable to provide.
The US fiscal cliff agreement, which passed through Congress on the first day of the year, showed most US politicians in a bad light. Only at the very last minute before significant tax increases and spending cuts would have taken effect, did all participants agree to (i) a deferral of these measures for two months, (ii) a 4.6% tax increase on all incomes over $450,000, and (iii) a 2% payroll tax increase on all incomes up to $107,000. Obama got the tax increase for the top 1% of earners that he had campaigned for, which will raise about $60bn a year, and the Republicans demanded no further extension of the payroll tax cut, which will raise about $125bn a year. Together these measures will reduce US consumer incomes by a little over 1% of GDP in 2013.
As 2012 draws to a close, three things about central banks and monetary policy are becoming more apparent.
As 2012 comes to an end, a review of the performance of financial markets indicates that it has been (at the time of writing) a relatively good year for returns. The major equity indices have managed very acceptable gains - the UK 6.5%, the US 12.5%, Europe 13.5%, Japan 10%, Hong Kong 22%.

That the Eurozone ends 2012 in an apparently stable condition is mainly down to the work of two people. The first is Mario Draghi with his promise of potentially unlimited intervention in sovereign bond markets. The second is Angela Merkel’s with her summer policy decision that forcing Greece from the Eurozone would be more damaging than keeping it in.

Sifting through the small print of the Chancellor’s Autumn Statement, which could be summarised as very much a “steady as she goes” story, one finds the breakdown of the UK economic forecasts generated by the Office of Budget Responsibility.

In choosing Mark Carney as the next Governor of the Bank of England, George Osborne appears to have adopted the strategy employed by Roman Abramovitch, the owner of Chelsea Football Club, when selecting managers.

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