MONDAY 6 SEPTEMBER 2010
This weekly Briefing Note aims to pick out some of the key financial and economic issues touched on in the press over
recent days and from time to time includes the views of some of our independent fund managers.
Equities march on
Global equities recorded their first weekly gains since the start of August as US economic data countered fears of a
double-dip recession. The Independent reported that the US employment data for August revealed that private sector
jobs increased by 67,000, far exceeding the forecast of 41,000.
The Times reported Barack Obama’s reaction to be, “That’s positive news and it reflects the steps we have taken to
break the back of this recession.” The jobs report, on top of better-than-expected data from China on Wednesday,
sparked the biggest one-day rally in equity markets in two months. Across the globe, stock markets saw a significant
rebound from the falls of the last three months. In the UK, the FTSE 100 closed the week 4.3% higher than the level at
which it began, while in the eurozone, European stocks gained 3.6%. A host of merger and acquisition speculation
globally added to economic optimism, with US markets closing with gains of 3.2%, with financial and industrial stocks
especially boosted.
BHP v PotashCorp
One of the largest hostile takeovers around the world today is BHP Billiton’s bid for Canada’s PotashCorp. Potash,
derived from mineral deposits, is used almost exclusively as a fertilizer and the demand for food is set to keep demand
high for years as the global population continues to increase. BHP felt that the company was significantly undervalued.
But as The Mail on Sunday pointed out, by turning the spotlight on the company it is trying to take over, BHP has
ensured that it is no longer undervalued to the same extent that it was previously. The result of this may be that BHP
finds it very difficult to succeed in its bid for control. The paper speculated that PotashCorp could have been
permanently revalued for a number of reasons. China consumes about three million tonnes of potash per year, a figure
that will only rise, while the Russian wheat export ban will only serve as a reminder of the value of potash.
BHP shares rose last week to close at 1936p, which has caused speculation that the market does not expect the company
to succeed and therefore spend any cash. The mining company has offered $130 per share, but after they had alerted
investors to the value of PotashCorp and its role in the global economic picture, the stock closed the week at $149 per
share, an all-time high. China is the world’s largest consumer of commodities and The Times reported on the potential
for the country launching a bid of its own to derail the BHP plans. However, opinion is still divided over whether a rival
bid would come from state-owned Sinochem, or from a consortium behind a Chinese sovereign wealth fund. The
Financial Times was of the opinion that the Chinese government was actively backing a counterbid in an attempt to
secure global resources. Mining analysts were of the opinion that the size of BHP’s $39bn opening offer was always
going to be the largest stumbling block, because very few private companies can match that sort of financial strength.
However, Chinese government-owned companies have access to a far deeper pool of funds, either through soft loans by
state banks or via access to sovereign wealth funds.
The bigger picture
Depending on who you listen to, or which papers you read, the US economy is either booming or collapsing, and Britain
has either the best prospects for economic growth in Europe or is about to sink into recession. It is almost no wonder
that global stock markets have seen increased volatility over the past three months. However, The Sunday Times
encouraged its readers to look at the bigger picture. The International Monetary Fund expects global growth of 4.6% this
year and 4.3% in 2011. These figures are heavily weighted towards emerging economies such as China and India at
around 6.5%, but growth is still there in most parts, with the US and Britain at around 2.5%. Even Europe, the area
perceived as having the most short-term problems, has had its predicted growth rate raised to 1.6% for this year. The
paper pointed out that recovery has never gone in straight lines. There will be months when data will seem weak, and
there will be months when it is strong, while pockets of extreme weakness will always exist, much like the American
housing market currently.
The article also asked why businesses are so keen to downplay economic recovery. The first reason they
cited was that chief executives in statements rarely shout from the rooftops about the state of the economy,
for fear that they undermine their own efforts. Secondly, and more importantly, businesses think of
recovery in different terms than economists. For companies, it is not about when the economy lifts off the
bottom, but when order books and trading activity gets back to normal. Only when this happens will chief
executives start to acknowledge a real economic recovery, which could realistically take a further two
years or more.
The paper opined that a real recovery indicator was that thoughts are already turning to rising interest
rates. One member of the Bank of England’s Monetary Policy Committee, Andrew Sentance, has already
voted for a rise in each of the last three months. While it is expected that interest rates will remain at 0.5%
this week, and indeed for months to come, the fact that discussions have begun on an exit strategy is a
significant “straw in the wind”. Whilst such a decision would mean the 18th consecutive month without
change, the Governor, Mervyn King, has repeatedly stated he would feel more comfortable with base rates
at normal levels. The Sunday Telegraph opined that while the general consensus is that 0.5% will be the
base rate for the foreseeable future, when they do start to rise they will do so quickly. Sir John Gieve, the
former Bank of England deputy governor, said last week he expected rates to rise at a quicker pace,
stating, “I am expecting a recovery, and when that is strongly established, rates will rise quicker than the
market expects. I wouldn’t be surprised to see rates at 2.5% a year from now.”
Outlook for equities
The Financial Times discussed how equities are currently viewed by investors looking for long-term
solutions for their money. Price to earnings ratios are two and a half times cheaper than they were 10 years
ago, dividend yields are higher than 10-year Gilt yields, which rarely happens, but investors are still in
some cases wary of equity investment. As the paper pointed out, global equities have only returned 4%
total in sterling terms, while government bonds have delivered 103% over the same ten-year period.
During this time, investors have had to cope with two savage bear markets. Also, in a world where
Japanese-style deflation is seen as a significant threat, bonds are often seen as a more attractive
investment. However, the article stressed that investors shouldn’t give up on equity investment. Half of
FTSE 350 companies currently yield more than 10-year government bonds, and in a low-inflation
environment, that will always look attractive. Also, large corporations are buying assets in the equity
market and borrowing cheaply on the bond market, which will push prices higher the more it happens.
This week, research from Reuters showed that August marked the first time in five months that investors
have increased their holdings in equities. As reported in The Times, most fund managers now seem to
think a double-dip recession can be avoided, though the primary reason for equity investment could well
be that real returns in cash are virtually nothing, as savers are all too painfully aware, while Gilt yields are
being pushed lower due to the necessity of further issuance by the government.
The fund manager of the St. James’s Place UK Growth portfolios, John Innes of RWC Partners, recently
commented on his outlook for UK equities in particular. “The latest market rally was on much thinner
volumes than during the falls in the early summer. For the technical analyst, the market is therefore still
troubled after the breakdown. For the fundamental analyst, however, the bear stories are being knocked
over one-by-one. The global economy has not melted down into a 1930′s depression, nor has inflation
taken off despite all the quantitative easing. The ‘climate of fear’ was re-created with a credit marketinspired
attack on the Euro and Sovereign Debts, but this has been countered by the huge €750 billion
support package agreed in May. The new UK coalition government has also avoided any sterling crisis by
a new-found emphasis on deficit reduction. Corporate results have generally been much better than
expected, including the banking sector, and the threatened regulatory strait-jacket has been considerably
loosened. Corporate M&A activity has also materially picked up, suggesting an increase in corporate
confidence and bank willingness to support soundly financed deals. Other than the normal worries over
global terrorism, Iran etc. there remain two major economic concerns. The most obvious is the current
“soft patch” in the US economy and in particular the lack of rapid improvement in the jobs market.
The other concern is whether the planned slowdown in China develops into something more severe. The
fund is still positioned with a more optimistic view of the equity market and the global economy so the
portfolio remains invested to benefit from a cyclical improvement in economic activity from a very low
level and from a continued reduction in stress in the financial markets. We remain fully invested in
recognition of the overall cheapness in the equity markets, both on an absolute basis and especially
relative to government bonds and cash.”

The St. James’s Place Wealth Management Group provides wealth management services. Members of the St. James’s Place Wealth Management Group are authorised and regulated by the
Financial Services Authority.The St. James’s Place Partnership and the title ‘Partner’ are the marketing terms used to describe the representatives of the St. James’s Place Wealth Management
Group. St. James’s Place UK plc: Registered Office St. James’s Place House, 1

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Economic data showed a two speed recovery in the eurozone with the German economy racing ahead of its rivals at the fastest rate for two decades – demand for its cars boosted exports.

US Federal Reserve Chairman, Ben Bernanke, was forced to announce a change in policy following recent poor US economic data: the Fed will give a monetary boost by re-investing its maturing mortgage-backed securities into government bonds, thus keeping interest rates low.

In the UK the BoE reduced its growth forecast for the next two years but still sees the economy growing around 2.7% pa – much in line with longer-term trends.

Stock markets suffered a two way pull but finally succumbed as investors decided to head for less-riskier investment such as the dollar, government bonds and yen.

Standard Life’s investment chief Keith Skeoch believes now is the time to buy UK equities seeing the FTSE100 index hitting 6,000 by year end.

Despite their excellent run there is still value and merit for investors in owning corporate bonds within their portfolios according to fund manager Paul Read of Invesco Perpetual.

Should you need any further details please call me on 07971 462558

Colly Brook Fine Furnishings, Upper Bank, Eastham, Tenbury Wells, WR15 8PA. Signposted from the A443 near Newnham Bridge.
Tel: 01584 781255
email: pen@collybrook.co.uk

-An overview of different tracks and poles
-Taped curtain headings
-Measuring and estimating fabric requirements
-Locked in linings and mitred corners

You will make a sample, lined curtain with hand finished hem and sides and machine heading tape  to take away along with handouts.

The cost for the day is £80, and this includes all materials, tea, coffee and lunch.

For further details or to book your place, call Pen Harrison on 01584 781255 or email pen@collybrook.co.uk.