Market Winners And Losers

Posted on: 15 December 2008 by Gareth Hargreaves

The precarious position of the Detroit Three and the continued fall of the pound highlight yet another mixed week in the Markets.

Car Crash? Well nearly.

The fate of America’s three largest carmakers played a pivotal role in financial markets last week, keeping traders on the edge of their seats. Early on in the week it seemed likely that the US Senate would vote for a $14bn bail-out for the ailing industry, but as The Financial Times noted, this failed to transpire.

The ramifications of allowing the Detroit three to fail understandably weighed on investors – analysts say that as many as 3.5m US jobs rely directly and, crucially, indirectly upon the motor industry and any collapse would have a serious impact on the economy. A senior strategist told The Financial Times that “The reverberations across the globe would be manifested, potentially bringing other economies to their knees.”

Equity markets traded nervously throughout the week as did the US dollar and commodity markets, as traders fretted about the outcome. But just when things looked most gloomy there was a last minute ray of hope as the Bush Administration scrambled to save the carmakers late on Friday.

The US Treasury signalled that it was ready to step in, using funds originally intended to prop up the financial system, to prevent what would undoubtedly be the largest industrial failure in American history.

The news was met with palpable relief on Wall Street, enabling stocks to reverse earlier losses and move into positive territory. The news will impact here in Britain too because there are concerns in Government about the fate of Vauxhall – a subsidiary of General Motors – and indeed the car industry as a whole. Again thousands of jobs are potentially at risk and the weekend press speculated that Lord Mandelson will announce a package of limited financial support to help suppliers and prospective buyer’s access finance.

In the UK there were further job cuts announced - The Times said that more than 3,000 were lost as banks, media and construction groups braced themselves for a tough new year.

In the retail sector, hopes that a buyer would be found for Woolworths all but evaporated as the administrator, Deloitte, announced a closing down sale to clear stocks at large discounts and raise as much cash as possible. Woolworths employs around 30,000 and The Financial Times reported that staff had been told that they could be made redundant if no buyer emerged in the next fortnight.      

Winners & Losers

Elsewhere in the corporate world, troubled mining giant Rio Tinto unveiled a range of measures – from drastic job cuts to asset sales across the globe – in efforts to reduce its debt pile. And following on from the ‘yes’ vote by HBoS shareholders to the Lloyds takeover, the bank’s new owners prepared to scrutinise corporate assets for possible sale.

The vote coincided with news of a surprise £3.3bn impairment charge announced by HBoS against its corporate lending activities, which was enough to send banking shares lower across the sector.

Notwithstanding the steady flow of poor economic and corporate news, the stock market notched up some useful gains along with overseas bourses. Equities had received a huge boost at the start of the week following the announcement that President-elect Barack Obama intended to implement a $1 trillion infrastructure spending programme to boost the American economy.

As the infusion of cash grows globally, Jean-Claude Trichet said the £4.5 trillion injected to date may not be enough – the ECB president said more could be needed as evidence emerged that the eurozone economy was shrinking. But whilst shares were winners the same could not be said for sterling which took more punishment in the currency markets, plumbing a fresh low against the euro as the outlook for the UK economy deteriorated.

By the close of business on Friday the pound/euro exchange rate was 1.12 – a twelve month low. Sterling has now fallen around 20% against the euro since the start of this year, but has also declined against the greenback and a wider basket of currencies as investors scrambled to exit the currency.

Whilst there are benefits for some – Oxford Street is busy with European shoppers and exporters are doing well – it’s not all good news, as The Sunday Times pointed out. The pound’s fall could limit the Bank of England’s scope for further aggressive cuts in interest rates, according to analysts – although few doubt the BoE will continue cutting. More likely though is that the pace of future cuts will slow so as not to alarm investors.

Over in the US, the markets are expecting the Federal Reserve to cut interest rates by half a point to 0.5% when it meets this week – such a move would bring the cost of borrowing down to its lowest level for decades.

Not So Slick

The leading Goldman Sachs oil analyst who caused mild amusement when he predicted back in 2005 that the cost of crude could hit $200 was three quarters right when oil hit $147 per barrel in July has turned bearish. Arjun Murti has slashed his forecast for 2009 to $45pb citing “incredibly weak demand” as the global economy slows.

He is also sceptical that OPEC can do much about it even if they can agree production cuts – notoriously difficult when the likes of Venezuela are desperate for revenue. Mr Murti’s bearish views coincided with new figures from the International Energy Agency (IEA) which showed that global demand for oil will fall to 85.8m barrels per day this year, representing the first year-on-year decline since 1983.

It comes as no surprise to learn that plunging demand is being led by the US – which consumes around a quarter of the world’s energy output – but also by Japan, the world’s second largest economy.

Japan officially went back into recession last month and last week, Taro Aso the country’s embattled Prime Minister, announced a huge Y23 trillion (£169bn) economic stimulus package in a final attempt to rescue Japan from another painful and long recession.

It is not just the developed economies that are suffering it seems. The Times reported that a shock slump in factory output in India – the first for 13 years – has compounded fears that the country is heading for a rapid slowdown as global demand for exports shrivels. An economist at HSBC said “The industrial sector and indeed the economy as a whole has been softening for some time. The situation is deteriorating more rapidly now”.

It’s a similar story in China too, according to The Financial Times, with the government announcing that exports fell in November from a year earlier for the first time in seven years. Of course the news should be seen in context, as both economies are still expected to grow, albeit at a slower rate. China is forecast to grow at 7.5% during 2009, down from 11%, but this compares to negative growth in Western economies.

Slowing global demand has created choppy waters in the shipping industry – geared for continued huge growth in the developing world it has been hard hit by the slowdown. Industry experts predict a sharp shrinkage in capacity as ships are left at anchor, probably in the Far East, until demand picks up again.

New Year Rally

Anthony Bolton, one of Britain’s best-known stock pickers before his retirement, believes a new bull market will start in the New Year with investors caught out by the strength of the rally. Interviewed by The Sunday Times, the veteran investor said that, whilst this was the worst financial crisis in his career, it was already priced into shares – setting the scene for a healthy rally next year.

Bolton was reported as saying that all the indicators pointed to a market bottom, such as cheap valuations, volatility and negative sentiment. He thinks the economic downturn is likely to get worse, although not as bad as the 1930s, but pointed out that stock markets tend to bottom 6-12 months ahead of the economy.

Against this background he expects the rally to start in the first quarter of 2009 led by financial stocks such as banks and also consumer cyclicals such as retailers. His view is that the US, having been the first into the credit crunch, could be the first out.

If right, his prediction will be welcomed by millions of investors who have seen the value of their investments tumble this year in response to the turmoil in financial markets caused by the credit crunch and ensuing economic slowdown.

One of the UK’s current investment stars is Neil Woodford of Invesco Perpetual – renowned for his consistent performance despite his cautious approach in recent years. The Sunday Telegraph identified him as one Britain’s top fund managers using a measure known as ‘alpha’ – a way of comparing how good a manager is at stock picking and generating outperformance – and the paper said, although scores of up to three are impressive, Neil Woodford scores 7.7.

He told the paper that his approach is moulded to suit the current environment with his cautious outlook leading to a defensive strategy to the degree that he hasn’t, for example, owned banking shares for many years.

Neil Woodford also manages funds for St. James’s Place and recently talked about how he currently sees events. “We have been cautious in our outlook for the UK economy for some time now and, for the last two or three years, would describe our stance as being at the bearish end of expectations.

However, as the credit crunch has intensified, the implications for the global economy have become more severe. The UK economy looks particularly vulnerable to these developments. The prospect of any upturn in economic activity is unlikely before 2010, in our view.

“In terms of UK equities, valuations are low in our view, and we believe that the market as a whole is somewhere near a low point. Although, we believe that further downside in individual stocks within the market is possible.

To summarise, with no sign of respite for the UK economy, we are more optimistic about prospects for the UK equity market and, specifically, for our funds. Volatility is likely to remain a feature of markets in the next few months as the financial crisis unfolds and the extent of the slowdown in the global economy becomes more apparent. But looking beyond this period, prospects look brighter for investors with long-term time horizons. Selectively, UK equity valuations look very attractive on a three- to five-year view and we remain confident we can deliver solid returns to investors over that time and beyond”.

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