The Word from Hansard, 2nd Sep 2009

The Word from Hansard

Orders placed with US factories probably rose in July by the most in two years as companies tried to prevent stockpiles from dropping further, economists said before a report today. Bookings rose 2.2%, the most since July 2007, according to the median projection of 63 economists surveyed by Bloomberg News. Other reports may show worker productivity climbed and job losses slowed. Companies from Intel Corp. to Rockwell Collins Inc. are among those seeing demand stabilising as customers in the US and abroad, buoyed by growing profits and more accessible credit, begin to invest in new equipment. A rebound at automakers resulting from the US government’s “cash-for-clunkers” plan may give orders an added boost in coming months as dealers restock. “Inventory levels have been worked off pretty much as far as they’re going to go,” said Carl Riccadonna, senior US economist at Deutsche Bank Securities Inc. in New York. “We should see further evidence of production picking up in the third quarter and also as we go into the fourth quarter. That’s a key development of the economy showing early signs of life.”

European consumer spending rose for the first time in more than a year in the second quarter and exports fell at a slower pace, helping to ease the worst recession in more than 60 years. Household spending in the euro area increased 0.2% after declining 0.5% in the first quarter, the European Union’s statistics office in Luxembourg said today. Exports fell 1.1% after an 8.8% drop in the previous three months. Gross domestic product declined 0.1%, the office said, confirming an initial estimate published on 13 August. European companies have reported higher earnings, suggesting government efforts to encourage spending and fight the economic slump are gaining traction. While confidence in the economic outlook increased for a fifth month in August, European Central Bank President Jean-Claude Trichet has said that rising unemployment may slow the recovery. “Shrinking times are over and the recovery can set in,” said Carsten Brzeski, an economist at ING Groep NV in Brussels. Still, “don’t count on private consumption as a growth driver in the near future. The recovery will be strongly dependent on exports and the pick-up in global demand.”

Crude oil, which fell from a ten month high of USD 75 a barrel in New York last week, remains in an uptrend and a sustained move lower isn’t likely unless prices settle below USD 66, National Australia Bank Ltd. said. Oil may climb to its recent highs in coming weeks even as the volatility in prices reflected uncertainty among traders, according to Gordon Manning, a Sydney-based technical analyst. He correctly predicted 5 August that the market wouldn’t settle below USD 66 a barrel on its way to a new high for 2009. “It’s not a downtrend in my books,” Manning said today. “It certainly hasn’t pushed on with the sort of aggression that I thought it might do, but there’s not enough damage to really get too worried.” Oil slipped 1.6% last week after touching USD 75 a barrel on 25 August, the highest intraday price since October, as traders interpreted weaker equity markets as a sign global demand for fuels won’t recover anytime soon. The contract for October delivery on the New York Mercantile Exchange traded at USD 68.30, up 25 cents, today in Singapore. Futures have gained 53% this year. On the weekly and daily continuation charts, the market is showing signs of a breakdown in the rally that started in February, Manning said. Prices yesterday fell to USD 68 a barrel, a two-week low, which represented a downside test of an ascending trend line. “We are getting a bit of momentum failure on some of the indicators,” Manning said. “If we had a close under USD 66.50, that would move things a little bit more into the negative side. If that’s reached, there’s a risk that we would go back to the USD 58-USD 59 area.”

The yen advanced to a seven-week high against the euro and dollar as European stocks declined on speculation a six-month rally outpaced the prospects for earnings growth, spurring demand for safety. Japan’s currency rose versus counterparts including the Norwegian krone as the Dow Jones Stoxx 600 Index of shares slid 0.8%. Australia’s currency climbed versus all of its major counterparts after a report showed the nation’s economic growth unexpectedly accelerated in the second quarter. “The equity markets turned over quite quickly, and that led to a risk-version trade and a yen trade,” said Paul Robson, a senior currency strategist at Royal Bank of Scotland Group Plc in London. “We had some stops taken out on dollar-yen.” The yen appreciated 0.3% to 131.87 per euro at in New York early on Wednesday, from 132.19 yesterday, after earlier reaching 131.33, the strongest level since 15 July. Japan’s currency climbed 0.3 % to 92.68 per dollar, from 92.92, after reaching 92.38, the strongest level since 13 July. The euro was little changed against the dollar after the European Union’s statistics office affirmed that the economy of the 16 nations that use the currency contracted 0.1% in the second quarter after a record 2.5% drop in the previous period.

Spotlight on US Equities

Recent months have seen a big improvement in investor sentiment. So where does the US market go from here and what will drive it? More bullish observers note that more forward indicators, such as business sentiment surveys, have become much more positive of late. And companies have meanwhile been merciless in cutting inventories. So any stabilisation in demand should spur a rapid uptake in production. Meanwhile, in the wake of the earlier market risk aversion, there is a vast amount of cash available to invest.

According to Cormac Weldon, head of US equities at fund managers Threadneedle, there are a number of industries he believes have the potential to do relatively well should challenging conditions persist. Having survived the difficult conditions following the bursting of the dot.com bubble at the beginning of the decade, IT firms are among the leanest and best managed of companies. Most important, their managements know better than those of most other companies how to adapt and pull through in a very tough environment. This is why he sees them as some of the most likely to come out of the current downturn in a strong position when the good times return.

In particular, a number of software companies offer predictable revenues, profits and the ability to grow in the current environment, for example CA, a company that provides software, which manages mission critical mainframe computers. In addition, Apple continues to grow, supported by its creativity in designing products such as the iPod and iPhone.

If difficult business conditions continue, Weldon sees a return to favour of growth stocks, i.e. those companies possessing strong competitive advantages that enable them to generate earnings even in challenging economic circumstances. In general, defensive stocks have underperformed the market so markedly in the spring rally that they are likely to benefit from any return of investor caution.

However, the unexpectedly strong second-quarter earnings results revealed by many companies from across the market not only delivered a boost to market sentiment, but have also persuaded many that a number of well-managed companies, both cyclical and defensive have the potential to reward investor interest.

Weldon believes that the recent rallies in oil and other commodity-linked stocks probably have further to run, as markets increasingly focus on the constrained supply and the potential for increased demand when the economic recovery begins to gather steam. However, having examined potential winners and losers at the sector level, one of the big themes Weldon expects to see going forward will be a greater focus by investors on individual companies, instead of sectors.

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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