The Week Ahead

Monday, 3rd September 2012 16:10 - by David Harbage

Major macro-economic events

Monday 3rd

The health of the manufacturing part of the UK, and the prime European economies, will become clearer upon receipt of the Markit/CIPS purchasing managers index (PMI) survey results for the month of August. Published monthly, an outcome number above 50 represents growth, whereas a lower number suggests contraction. Ahead of this data, the equivalent indicator of manufacturing in China (which, as you might anticipate in that country, represents a much higher proportion of total economic activity) showed a surprisingly weak outcome of 47.6, as compared to the July reading of 49.2, and relative to an expectation of 50. Both the UK and the European numbers are set to be sub 50, although the particularly sharp fall in the domestic survey in July was probably an aberration and could prompt a retracement of that outcome.

Thursday 6th

The monthly monetary policy committees of the UK and European central banks are due to pronounce on their respective regional economies. And this time around, these monthly deliberations appear especially critical for the Euro zone. Pressure has been growing, from politicians and business in particular, for further action to be taken to address the current stagnation – with demands for both cuts in interest rates and further boosts to the money supply via quantitative easing (QE). Such calls follow the Bank of England’s recent review and defence of its policy to repurchase gilts; a ‘necessary evil’ view, upheld by a consensus of leading local economists.

By contrast, central bankers in Frankfurt take a less benign stance: Jens Weidmann, the head of the Bundesbank, which has a history of being conservative, views QE as an illegal repayment of national debt. Investors have given the authorities a little more time, bought by the words of the head of the European Central Bank (ECB), when Mario Draghi promised to take whatever action was necessary to defend the Euro and the financial structure of its constituent nations. However, as typified by the call from Angel Gurria, the secretary-general of the Organisation for Economic Co-operation & Development (OECD), markets would welcome a resumption in the European Central Bank (ECB) government bond purchasing program (Euro 208.5 billion to date, as compared to the more aggressive £375 billion approved by the Bank of England).

If the ECB’s deliberations do not lead to an authorisation of significant bond purchase action, or a cut in interest rates for the Euro zone (from a current 0.75%), the market is likely to be disappointed and both bond yields and equity valuations are set to come under pressure. Forex is likely to be less predictable or at least deliver a straightforward result as, while decisive action from the ECB’s policy setters may be welcomed, immediate cash returns (the ‘carry trade’) will appear less attractive relative to alternate currencies.

While economic performance in the UK is no better than that of Europe overall, and the country shares a similar difficult short term prognosis, pre-emptive action has already been taken by the Bank of England (although the ‘medicine’ appears to have only ameliorated, rather than cured, the problem) and the MPC may have doubts surrounding recent statistical data and the magnitude of domestic output. Although reducing the UK’s Bank rate (also known as the Base rate) further – to say the lending levels that apply in Japan or the United States, of between 0% and 0.25%, the impact on the economy would be marginal (and politicians would not appreciate the potential uproar from the cut in savers’ returns). A £50 million increase in domestic QE would be more likely.

Other economic news due:

Tuesday – UK construction industry PMI survey data and British Retail Consortium’s (BRC) sales monitor. United States Institute for Supply Management (ISM) manufacturing data and construction spending/orders. European Producer Price index (PPI) provide an indication of input cost inflation and (by reference to end prices) corporate profit margins.

Wednesday – UK service sector PMI survey data (big slice of GDP) and BRC retail prices (another end price inflation indicator). European services sector’s PMI and retail sales data. Three big statistics from the US: mortgage applications and car sales, plus productivity (impacts profitability).

Thursday – UK car sales. European construction sector PMI and GDP for Q2 2012. US jobless data (both initial & continuing), ISM service sector and Bloomberg consumer confidence numbers.

Friday – UK manufacturing and industrial production data, plus an update on PPI. European industrial production and retail price inflation data. US non-farm payroll numbers and the unemployment rate.

Company News:

Tuesday 4th

Final results are due from Genus, an interesting company which applies its science towards animal (bovine and porcine) breeding and is a potential beneficiary from increasing global (per capita) wealth as large populations move up the food chain, from rice towards greater meat consumption. In the year to 30 June 2012, profits of this FTSE250 constituent are set to have grown by 13% to £13.5 million and further double-digit progress in anticipated in the current year. However, having seen the share price more than double over the past three years to reach a price earnings multiple of 27 (and more critically a PEG ratio in excess of 2, going forward), Genus’ equity appears to be “up with events”. In the absence of supportive income (yields 1.1%) or assets, management comments on the outlook will have to be particularly upbeat to prevent the stock appearing overvalued, and succumbing to profit taking.

Wednesday 5th

An interim management statement from London-focused apartment and house builder, Berkeley Group, is expected to maintain investor enthusiasm for this beneficiary of the capital’s resilient housing market. The investment buyer cannot fail to have been impressed by the Olympics’ showcase of the city, and equity investors will have noted a pick-up in gossip surrounding industry consolidation - aided last week by Steve Morgan’s approach to take Redrow private (by acquiring the 60% he does not already own).

The announcement of final results from Midland-based real estate investment trust (REIT) A&J Mucklow Group maintains the interest on property, but this represents a very different business – by reference to both commercial/industrial product and typical geography - but an interesting one nevertheless, as it provides a fair insight into the health of UK plc. Analysts anticipate pedestrian profit growth, of 4% to deliver £13 million, and a dividend hike of similar magnitude (the company distributes circa 85% of such earnings to shareholders, and the full year dividend currently equates to a net yield of 5.1%). Financial gearing at this relatively small (in stock exchange, rather than absolute,  terms at £220 million market capitalisation) business  is undemanding at 38%, post two recent purchases which evidence the existence of cheap (and perhaps distressed vendors) properties boasting rental yields in excess of 9%.

Thursday 6th

William Morrison, one of the Big Four amongst the UK’s supermarket chains, is due to report its half year to 31 July trading results. That competitive pressures have increased in 2012, especially post Tesco’s admission that it was struggling to maintain its dominant position, will be evident as profits are likely to have fallen by 2% to £435 million. Like-for-like, ex-fuel sales growth at its 455 stores will be pedestrian reflecting consumers’ increasing appetite to move downmarket (to lower priced products, as well as towards Aldi/Lidl or discount stores) in the absence of any growth in disposal income. Despite a near 20% correction from its January 2012 peak (a 5 year high) to offer reasonable value, Morrison stock is unlikely to excite growth-minded investors. In response to a growing threat from the internet, management can be expected to ‘talk down’ its medium term store development program and rather focus on conserving cash in the short term. A significant (say 10%) hike in the dividend, which is currently covered 2.3 times, and the promise of ‘more of the same’ in the current year would represent a useful loyalty bonus to its large share holder base.

Friday 7th

In the absence of significant trading news from other listed businesses (leaving aside chocoholics’ favourite Thorntons – who announce full year results), all eyes – post any post mortem on the previous day’s central banks’ deliberations – will be on the shareholders’ vote on Glencore’s plans to merge (or acquire, according to perspective) with Xstrata. Prima facie, this US$89 billion combine could produce very substantial synergy benefits and, with Glencore already owning 34% of Xstrata stock, its offer of 2.8 new shares for every 1 Xstrata was expected to succeed. However, allegations of a ‘cosy deal’ became louder as senior managers were promised ‘lock-in’ bonuses (incentives without performance-related terms), and investors (led by 12% stakeholder Qatar Holdings) objected to the absence of a meaningful bid premium. Current probability is for the deal to collapse, rather than progress. 

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.