A global economy still produces localised investment conclusions

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A global economy still produceslocalised
investment conclusions

• Dr Savvas Savouri
• Managing Director
• QuantMetriks Research Ltd

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UK

• The MPCs failure to cut borrowing costs during
  Q1 may prove a misjugement. Raising rates would
  be certain economic insanity
• 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, dont rule out the next move in UK
  rates actually being downward
• The UKs 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. Dont dismiss
  miners too easily

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Europe

• Whilst Germanys 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
• As the dollar slides the euro will necessarily
  appreciate, sapping the euro-zones
  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.

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US

• The troubled US housing market will deteriorate
  much further. A sliding residential sector will
  hit consumer spending. The US will soften
  against most major currencys, 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
• The rebound in US corporate earnings is set to
  reverse, with financials particularly badly hit
• Investment conclusion. SELL the . BUY US trade
  cyclicals and overseas earners

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Japan

• The drawn out, but now faltering rally in the
  major Japanese equity benchmarks, has been driven
  by liquidity rather than organic earnings growth
• 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
  re-emergence 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

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China

• 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), Chinas 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 Chinas non-farm payrolls NEED
  to grow at c10 each year
• Since its domestic consumer base cannot yet
  deliver 10 growth, and given the Yuans
  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 Chinas post 2001 economic growth story
• Investment conclusion. The almost certain sell
  off in the UKs 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

• Global China from 2001 a play in three acts,
  June 9th
• UK Whos 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 Recover-every exit, March 2nd
• UK Buying into the Nickell story, February 21st
• Europe Mid cap industrials, February 9th
• US Inflation You aint 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
• Each note is available on request
  (Nas_at_QuantMetriks.com) in either hard copy or
  electronically. No Fee.