The Word from Hansard (23rd December 2008)

Barack Obama has expanded the goals of his proposed economic stimulus, with a plan to create or save an additional 500,000 jobs. The president-elect raised his job’s target over the next two years to 3 million, up from the 2.5 million goal set last month, as US unemployment reached its highest level for 15 years. Transition officials said Mr Obama had agreed the outlines of a USD 675 billion to USD 775 billion two-year recovery plan last week. But the cost is likely to rise above USD 800 billion as Congress makes its own demands during the legislative process.

The Irish government is to put 5.5 billion euro into Ireland’s three largest banks, taking control of Anglo Irish Bank Corp. The government will inject 1.5 billion euro into Anglo Irish in return for preference shares with 75 percent of its voting rights. Ireland, which was the first country in Europe to guarantee all bank deposits, is being forced to use public money after initially urging the banks to seek private investors to assist in the country’s bank bailout.

The pound weakened against the euro, moving closer to parity for the first time, as traders increased bets the Bank of England will lower interest rates to stimulate the UK economy. It depreciated to 94.71 pence per euro in London and also dropped against the dollar to USD 1.4870, from USD 1.4920. The yen has weakened against the dollar and euro as Japanese exports have decreased and the US government aid to General Motors and Chrysler reduced demand for the currency as a haven. The yen dropped to 126.30 per euro in London and to 89.76 against the dollar.

Crude oil traded above USD 42 a barrel after OPEC restated its commitment to enact production cuts announced last week. OPEC is "determined" to stabilise oil markets, the Saudi Oil Minister said yesterday. Oil is poised for the first annual decline in seven years, falling 55% in New York so far in 2008. Crude oil for February delivery traded at USD 42.44 in electronic trading on the New York Exchange earlier today.

Most analysts think it’s unlikely that European stock markets will rally before the second half of 2009. However, they think there may be some good values even in cyclical businesses such as manufacturing. Bleak earnings outlooks have already been factored into many share prices. And, says Philip Isherwood, chief European equities strategist for investment bank Dresdner Kleinwort in London, managers at some companies "are becoming more realistic," trimming their forecasts and moving aggressively to reduce costs.

He adds that such companies are likely to outperform rivals even in a poor economy, and they’ll be well-positioned for the next upturn. Isherwood gives one example: steelmaker Arcelor-Mittal, which faces a collapse in demand from carmakers and other big customers. It has announced tough cost-saving measures, including a plan to save USD 1 billion by cutting some 9,000 jobs. With its price-to-earnings ratio of just 2 based on 2009 predictions, its now being viewed as a "buy" by analysts.

Companies that dominate their sectors also can make good bets, as they emerge from the downturn with a tighter grip on their markets. "In tough times, the people who are stronger and able to invest are better off than weaker competitors," says Nokia CEO Olli-Pekka Kallasvuo. Nokia, which holds 38% of the global cell phone market, has twice revised its 2008 sales forecast downward, but it has a healthy balance sheet and generated more than USD 1.6 billion in cash flow during the third quarter. With its shares off by two-thirds in this year’s market turmoil, it looks like a good buy, say analysts.

Currency movements could produce some winners too. Shares of luxury-goods giant LVMH Moet Hennessy Louis Vuitton have fallen some 30% since September as demand has weakened in key markets. Although LVMH’s sales growth in 2009 will be only 3%, HSBC predicts earnings will jump 6% because LVMH books about half its sales in dollars and yen, which have risen sharply against the euro.

Spotlight on Latin America

Wal-Mart Stores Inc’s planned purchase of Chile’s Distribucion y Servicio D&S SA will be the discount retailer’s biggest acquisition in Latin America. Wal-Mart’s tender offer values Chile’s largest grocer at about USD 2.66 billion. The purchase signals Wal-Mart’s relative health at a time when other US retailers are struggling.

Brazil’s benchmark rate, Selic, will end 2009 at 12.25% according to a central bank survey of about 100 economists. Inflation is forecast at 5.02% next year by the same survey. The central bank targets inflation of 4.5%, plus or minus 2 percentage points.

Mexican inflation may have stayed near a seven-year high in the first half of December, helping to delay any move by central bank policy makers to cut interest rates. Consumer prices in Latin America’s second-largest economy rose 0.27% in the first 15 days of December, according to the median estimate of 12 economists by Bloomberg. Mexico’s inflation rate will probably end the year above the central bank’s forecast of 6%.

Peru is advancing with plans to sell its first foreign bonds in almost two years to demonstrate its economy’s strength after receiving investment-grade ratings. Peru will follow Mexico, which yesterday became the first developing nation to tap international debt markets since September. The Peruvian government states it has no pressing need for the cash and doesn’t need funds to help finance a USD 3 billion economic stimulus plan announced last week.

The stock market turbulence of recent months appears to be settling into a period of less volatility and there are suggestions by market commentators that markets may have reached the bottom. While an immediate recovery may not be on the horizon just yet there will nonetheless be investment opportunities available where well-run companies with strong balance sheets and solid business models are currently being undervalued. Evaluating and selecting the right investments is not easy for the ordinary investor and requires professional expertise. Your Hansard account executive will be pleased to illustrate how potential opportunities can be captured using a combination of our product and fund structures.

The information set out herein has been obtained from various public sources and is sent to you by way of information only. Hansard can accept no liability of any sort in relation thereto and readers should obtain their own verification of any statement before making any decision which may have any financial or other impact.

Neither the information nor the opinions herein constitute, or are they to be construed as, an offer or a solicitation of an offer to buy or sell investments.