The Word from Hansard, 28th Jul 2009

The Word from Hansard

The rate banks say they charge each other to borrow in dollars for three months fell below 0.50 percent for the first time; signalling central banks’ efforts to end the two-year seizure in credit markets are working. The London interbank offered rate, or Libor, for such loans dropped to 0.496 percent today, from 0.502 percent on July 24, the British Bankers’ Association said, taking its decline this year to 93 basis points. The rate, a benchmark for about USD360 trillion of financial products around the world, peaked at 4.82 percent on 10 October following the collapse of Lehman Brothers Holdings Inc. in September. "I’m not saying the market has returned to normal, but my view is that the systemic risk we saw after the collapse of Lehman last autumn is perhaps gone," said Christoph Rieger, co-head of fixed-income strategy at Commerzbank AG in Frankfurt. "Rates should stay low in the foreseeable future."

The UK economy will grow next year following the actions taken by the authorities to boost activity but the recovery will be constrained by high levels of debt, a new study from a leading forecaster has claimed. The study, authored by Roger Bootle of Capital Economics for Deloitte, predicts that UK Gross Domestic Product (GDP) will rise 0.5% in 2010 and then by 1.5% in 2011, following a fall of 4% this year. Bootle said: "Overall the shape of the recovery is best described as U-shaped, but a W-shape in which growth accelerates more quickly and then relapses is certainly possible. But whatever the letter, a return to normal, let alone strong conditions in the UK economy remains a long way off." Bootle’s prediction follows last week’s worse than expected GDP figure which showed the UK economy shrunk by 0.8% in the second quarter, with GDP declining in total by 3.2% in the first half of the year.

The Norwegian krone, the third-worst performer against the euro since mid-2008, has become currency strategists’ favourite bet. Buying kroner versus euro will return more in the next year than all 48 other foreign-exchange trades tracked by global investment banks, according to median predictions in Bloomberg analyst surveys. Norway’s currency will rise 9 percent by June to 8.2 per euro, from 8.8680 on July 24, the median of 19 forecasts shows. The krone is "hugely undervalued" after falling 11 percent since 30 June 2008, Citigroup Inc. said. "The krone is due for a good bounce," said Peter Lucas, who helps manage about USD199 billion at RBC Wealth Management in Jersey, Channel Islands. "In an environment of rising commodity prices and moderate risk appetite, the krone will be one of the strongest currencies in the world," probably strengthening to below 8 per euro within "months," he said. Forecasters say the currency will gain as Norway’s economic recovery prompts policy makers led by Norges Bank Governor Svein Gjedrem to increase interest rates for the first time since June 2008 to control inflation, boosting returns on krone-denominated investments. The Organization for Economic Co-operation and Development predicts the country’s GDP will shrink less than the euro region this year and gain more in 2010.

Platinum will "find support" above USD 1,200 an ounce for the rest of 2009 as demand for auto catalysts climbs and jewellery sales rise in China, said Anglo Platinum Ltd., the world’s largest producer of the metal. Automakers’ demand for platinum group metals, which include palladium and rhodium, is likely to outpace a gain in car output because of low inventories, Anglo Platinum said today in a half- year earnings statement. Platinum jewellery sales to China rose by 400,000 ounces from a year earlier in the period, it said. "This response highlights the strength of platinum jewellery branding and the fundamentally different nature of Chinese platinum jewellery demand," the Johannesburg-based company said. "Global economic conditions continue to depress jewellery sales in most western markets." Platinum for immediate delivery gained USD 17.50, or 1.5 percent, to a one-month high of USD 1,205.50 an ounce at in London on Monday, rising for a fourth day. The metal has rallied 29 percent this year, outpacing gold and silver, on expectations an economic recovery will increase sales of jewellery and cars.

Spotlight on a possible new bull market

Legg Mason’s value investing legend Bill Miller says the worst is over for both the economy and the stockmarket. He thinks "bargains abound" and praises Ben Bernanke, but warns on three key risks that remain. Miller, who made his name by beating the S&P 500 for 14 consecutive years from 1991 to 2005 with the Legg Mason Value fund, thinks the new bull market is in full swing.

"Clearly the extreme risk aversion that characterised the period from early October to early March is over, and absent some exogenous event or dramatic policy error, it is very unlikely to return," he said in his latest market commentary. "That has allowed almost all asset prices along the risk spectrum to rise, except Treasuries, a trend I expect to continue, since I think bargains abound in the US stock market."

"Bull markets typically begin when the following four conditions are present: the economy is bottoming, profits are bottoming, the Fed is stimulating, and valuations are low. That’s where we are now," he says. He thinks the news flow from companies will continue to be negative, but believes investors should not become disheartened by this. "Those looking for the economic numbers to validate the market’s move higher or for corporate executives to express optimism about the outlook are likely to continue to be disappointed," he says.

"Economic numbers report the past, and corporations observe the present, while the market lives in the future. Corporations always express the most optimism about the outlook at the top, and the most pessimism at the bottom. Markets are about expectations, and expectations about the future are improving, on balance, and so are the markets."

There are caveats to Miller’s bullish outlook, however. "Although the market is up sharply from the lows and the economy appears on the brink of recovery, both can reverse if things don’t continue on the present path," he says. "I think there are three endogenous risks to watch for: rising interest rates, a sharp rise in commodity prices (especially oil), and policy errors."

With regards to interest rates, Miller expects medium and long term interest rates on treasuries to move gradually higher and that in six months, yields on ten year treasuries will be around 4%. "A sharp rise beyond that, though, could jeopardize a nascent housing stabilization and undermine the budding recovery," he warns.

Meanwhile, he thinks the risk of inflation in the coming years is "remote," claiming deflation is the bigger worry. Looking at oil, he thinks that should the oil price rise upwards of USD 80 a barrel, which could also pose a threat to a potential recovery. He is full of praise for the way the US authorities have handled the financial crisis, and thinks the chances of a major policy error that would strangle a recovery are slim. In addition, he thinks Ben Bernanke should shoulder a great deal of credit for his handling of events.

"The administration could help the economy, the markets, and its own reputation for good decision-making by announcing immediately its intention to nominate Chairman Bernanke for an additional term leading the Fed. He has done a superb job under the most difficult circumstances. No Fed in history has been more innovative and creative in dealing with unprecedented financial turmoil and global economic challenges. He deserves the nation’s gratitude."

Hansard has a variety of fund links across a diverse range of asset classes ranging from commodities to emerging market equities to climate change solutions. To find out more about our fund links please contact your Hansard Account executive who will be able to assist you further.

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.

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