Transcript A global economy still produces localised investment conclusions Dr Savvas Savouri

A global economy still produces
localised investment conclusions
Dr Savvas Savouri
Managing Director
QuantMetriks Research Ltd
1 Gracechurch Street,
LONDON. EC3V 0DD.
Tel: +44 20 7337 3500
Fax: +44 20 7929 0454
UK
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The MPC’s ‘failure’ to cut borrowing costs during Q1
may prove a misjugement. Raising rates would be
certain economic insanity
UK based Manufacturers: operating margin
8
•
The UK labour market is vulnerable to falling profit
margins across a range of important sectors. UK
retailers in particular are suffering margin sapping
competitive pressures.
In short, don’t rule out the next move in UK rates
actually being downward
6
% point change, yr on yr, 3mma
•
4
2
0
-2
-4
-6
-8
•
The UK’s dollar earners are threatened by the risk of
serious dollar weakness. It is conceivable that as
the Pound strengthens against the dollar it loses
ground against the euro
Investment conclusion FTSE250 at greater risk than
FTSE100. Whilst most dollar earners will be hit
certain names will be very badly mauled,
particularly those linked to US consumer/housing
markets. BUY gilts and property. Don’t dismiss
miners too easily
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
UK Manufacturers 15-36
UK based Retailers: operating margin
6
5
4
% point change, yr on yr, 3mma
•
-10
1992
3
2
1
0
-1
-2
-3
-4
-5
1992
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1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
UK Retailers 52
2008
Europe
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Whilst Germany’s manufacturers exploit the
global rebound in demand for capital
equipment, its retailers continue to wallow in
the mire
As Germany is at least managing to fire on
one economic growth cylinder, the French
economy lacks any real recovery catalyst, its
important autos sector is particularly weak
German based manufacturers versus retailers:
operating sales, €
12
10
8
% change, yr on yr, 3mma
•
6
4
2
0
-2
•
As the dollar slides the euro will necessarily
appreciate, sapping the euro-zone’s
competitiveness. The overall impact on the
euro-zone will be to import disinflation
Investment conclusion. BUY DAX, SELL CAC.
Within DAX buy industrial names. With CAC
continue to own energy stocks. BUY
Scandinavian exposure. SELL European
banks.
-4
-6
1994
1995
1996
1997
1998
1999
2000
German Manufacturers
2001
2002
2003
2004
German Retailers
2005
2006
2007
2008
ROGER
German based manufacturers versus retailers:
operating margin
4
3
2
% point change, yr on yr, 3mma
•
1
0
-1
-2
-3
-4
1994
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1995
1996
1997
1998
1999
German Manufacturers
2000
2001
2002
2003
2004
2005
German Retailers
2006
2007
2008
US
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The troubled US housing market will deteriorate
much further. A sliding residential sector will hit
consumer spending. The US$ will soften against
most major currency’s, culminating in China
revaluing its currency
A shift upwards in the Yuan against the US$ of
the order of 7% should be expected no later
than Spring 2007. Hopes that such an event
will be delayed to after China host the Olympics
in 2008 are misplaced
US based Housebuilders: operating margin
15
10
% pt. change, yr-on-yr (3mma)
•
5
0
-5
-10
1994
1995
1996
1997
1998
1999
2000
US House Builders
2001
2002
2003
US Manufacturers
2004
2005
2006
2007
2008
US Retailers
US based Manufacturers: operating margin
The rebound in US corporate earnings is set to
reverse, with financials particularly badly hit
6
5
•
Investment conclusion. SELL the $. BUY US
trade cyclicals and overseas earners
% point change, yr on yr, 3mma
4
3
2
1
0
-1
-2
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-3
1994
1995
1996
1997
1998
1999
US Manufacturers
2000
2001
2002
2003
2004
2005
US Retailers
2006
2007
2008
Japan
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The rebound in corporate profits has also
reflected a weak yen driving up repatriated
income
Zero interest rates have fuelled the fiction of an
economic rebound, whilst concealing the reemergence of inflation. The BoJ will have to
raise rates before year end. In anticipation of
this the Nikkei is likely to move lower and the
Yen higher, joining the euro in gaining ground
against the US$
Investment conclusion. SELL Nikkei. BUY Yen
Japanese based Manufacturers: operating
sales, ¥
10
5
% change, yr on yr, 3mma
•
The drawn out, but now faltering rally in the
major Japanese equity benchmarks, has been
driven by liquidity rather than organic earnings
growth
0
-5
-10
-15
1994
1995
1996
1997
1998
1999
2000
Japanese Manufacturers
2001
2002
2003
2004
Japanese Retailers
2005
2006
2007
2008
ROGER
Japanese based Manufacturers: operating
margin
4
2
% point change, yr on yr, 3mma
•
0
-2
-4
-6
-8
1994
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1995
1996
1997
1998
1999
2000
2001
2002
Japanese Manufacturers
2003
2004
2005
2006
2007
2008
China
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Since joining the WTO in 2001 China has been a growing force on the global economic
stage. In fact, few economies could have delivered both commodity inflation and finished
good deflation the way China has
•
Although its currency is set to be revalued upwards against the US$ there is no guarantee
that the Yuan will gain ground against the euro or indeed Sterling
•
Having grown using an export paradigm (Act I of its rapid growth story), China’s economy
is not yet ready to expand sufficiently on a domestic private consumption basis (Act III) to
meet the demands of rapid rural-urban migration
•
With 20-25 million souls moving from villages to cities each year China’s non-farm payrolls
NEED to grow at c10% each year
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Since its domestic consumer base cannot yet deliver 10% growth, and given the Yuan’s
revaluation will slow its export growth, so Beijing is set to sink its sizeable reserves into
major infrastructure projects – road, ports, power stations, airports and dams. This is Act II
of China’s post 2001 economic growth story
•
Investment conclusion. The almost certain sell off in the UK’s mining and oil stocks and in
capital good sectors should lead to opportunities to buy names in such sectors. Commodity
prices will move away from being denominated exclusively in $’s, helping UK mineral plays
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Sourced material for this presentation
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Global – China from 2001: a play in three acts, June 9th
UK – Who’s the banker in the black?, May 2nd
Global – Good years ahead for mining equipment manufacturers, March 15th
Global – What is going on in metals?, March 13th
Japan – Re:cover-every exit, March 2nd
UK – Buying into the Nickell story, February 21st
Europe – Mid cap industrials, February 9th
US – Inflation: You ain’t seen nothing yet!, January 26th
US – Desperate households, October 14th 2005
Global – G3 economies, Capital recoveries?, August 25th 2005
Global – Why China cannot afford a panic retreat from the US treasury market,
August 17th 2005
US – Counting up to $ depreciation – Yuan to free, July 26th 2005
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