Road to recovery always going to be rocky

After weeks of encouraging economic data boosting investor confidence, the markets have undergone something of a reality check over the last couple of days. Doubts have crept back into general investor sentiment with views now emerging to counter the positive outlook that’s been prevalent in recent weeks as the markets have rallied.

The principal driver was the downbeat assessment on global growth prospects from the World Bank, issued on 22 June. They changed their prediction on the contraction the global economy is likely to experience in 2009, downgrading this to 2.9% from the 1.7% contraction forecast in March. The Organisation for Economic Co-operation and Development (OECD) expressed a similarly negative outlook on global economic growth for 09, highlighting the current rise in unemployment as a particular difficulty.

Equity markets, commodities and currencies all felt a resultant impact. The FTSE 100 index closed on Monday 22 June at 4,234.1 points, a drop of over 110 points (2.5%), with the US Dow Jones Index experiencing a similar decline, falling 200 points (2.35%). Gold and oil prices fell to $920/oz and $67/bbl respectively after sustained rallies over recent weeks and copper also dropped to a 3 week low. The $ benefited from its perceived safety status as investors shifted back into the currency.

With the OECD Ministerial Forum taking place in Paris this week and the publication of their own economic forecast on 24 June, there may be further market reaction.

In our Viewpoint from 15 June we asked ‘Where do we go from here?’ following the period of sustained good news that indicated recovery was possibly being cemented as a reality. We suggested that despite current optimism, factors such as the rising costs of raw materials may stifle the apparent revival. If there was any doubt that the road to recovery was likely to be a rocky one then the past couple of days in the market make a strong argument to support this.

As always, it remains to be seen whether this latest bout of market turbulence is a wobble in a bull market resurgence, a correction to a more measured recovery or the first signs of a bear market clawing back.

Keep track of the latest market movements by logging into our Research Centre. From here you can follow the major market indices, read the latest financial news and track individual market sectors.

Food for thought, taking Stock in retail

UK retail sales unexpectedly dropped in May for the first time in three months.

The 0.6% decline from April, caught economists cold where many predicted that like for like sales would increase 0.3% on the previous month.

However, when examining the opportunities in the sector, first impressions may be deceiving. Whilst clothing, textiles and footwear retailers and department stores experienced a 1.4% monthly sales decline, the food stores sector experienced a 0.3% growth, according to the office of national statistics.

So are there opportunities in UK food retail?

Sainsbury’s now has more than 18.5m customers visiting its stores each week, and has continued to build on its first quarter growth by reporting that total sales had risen by 7.6%, in the 12 weeks to 13 June. This week, the group unveiled ambitious growth plans to raise £445m capital through new share issues and a convertible bond offering, the group aims to use this capital to increase store space by 15% over the next two years.

Tesco reported underlying annual pre-tax profits of £3.13bn, an improvement of 10% on the previous year, and the highest on record for a UK retailer. At that time it said its sales topped £1bn a week for the first time. The business attributed a large part of this growth to the fact that one in three of its customers now purchase from its discount product lines launched in September, keeping shoppers from shifting to lower-cost rivals Aldi Group and Lidl.

Morrison’s, which recently reported a 7.3% rise in first quarter sales in May, also unveiled ambitious growth plans stating that it will hire 5,000 people this year as its grocery stores expand and train more staff to become butchers, bakers and fishmongers. The Prime Minister mentioned Morrison’s hiring plans, as his office unveiled a 500 million-pound plan to counter UK unemployment, last week.

So, should the economic recovery unfold as predicted, the growth plans laid out by the main UK food retailers could have investors well placed to capitalise on share price growth.

Where do we go from here?

The last 10 days has seen the first significant news flow which supports the view that economic recovery in the UK and US has been established. But at the same time doubt is being cast over whether these initial signs of recovery could yet be snuffed out.

The Office of National Statistics subsequently announced that UK industrial output rose in April for the first time since February 2008. Analysts had been forecasting a fall of 0.1%, but in fact output rose by 0.3%. Furthermore, the National Institute of Economic and Social Research has estimated that the UK economy grew in both April and May to March 2009. The organisation has also stated that it expects official figures for Q2 2009 (to be published in late July) to show that the recession has ended or is on the verge of doing so. Many investors will welcome this first sign of tangible support for the stock market rally, which has seen the FTSE rise by 21% over the last 3 months*.

Raw material prices have also risen significantly since the beginning of the year. These rises have come in large part due to the effects of speculation, but the Purchasing Managers Index (PMI) suggests that higher levels of demand may transpire in the coming months.

However, it is these very price rises which have led some commentators to question whether the recent economic recovery will be snuffed out. With oil prices rising to almost US$72 per barrel this week against a 4 year low of US$32.70 in February, and speculative positions in the New York energy markets reportedly at their highest level since July last year there is the possibility that continued price rises will squeeze manufacturers in markets where demand is still fragile.

The key question is whether the high cost of raw materials may snuff out, or at the very least, stifle, economic recovery and the recent encouraging data just published becomes a mere blip before recession bites again.

If you think that these first suggestions of recovery are indeed sustainable, and that the stock markets have further to rise, you may want to consider investing in the main market trackers such as the iShare FTSE 100 or the iShare S&P 500 or get exposure to global markets through  iShares MSCI World or iShares FTSE Developed World ex-UK.

Alternatively, if you want to gain exposure to the commodities markets you may like to consider the JPM Natural Resources fund or alternatively Exchange Traded Commodities (‘ETCs’) for exposure to individual metals.

However, if you are more pessimistic about the markets and you are sufficiently experienced investor willing to take the higher risks, then you may like to consider playing out your strategy through use of derivative products such as covered warrants or CFDs.

The value of investments can fall as well as rise.

*based on closing price of 3,693.3 on 11-Mar compared to 4,472.1 on 11-June

Barclays Stockbrokers does not give financial advice, if you are unsure about investing you should seek independent financial advice.

UK political noise overshadows global markets

It has been a very mixed week on the domestic news front, with UK politics dominating public attention. The ongoing MPs’ expenses scandal has now been compounded with an apparently warring Cabinet, a reshuffle that the Prime Minister appears to have not been in full control of, local elections that saw the Labour Party lose all four of its remaining county councils and suffer humiliation in the European elections. As an investor you could be excused for missing any good news, but there certainly was some, economically speaking at least.

Last week’s highlights included:

• Figures from the UK Land Registry suggest that house prices edged a touch higher in April.
• US unemployment data released on Friday (5th June) showed a sharp fall in the number of jobs being lost in the US, leading to hopes that the world’s biggest economy may be through the worst of the recession.
• The US Consumer Confidence survey showed a positive divergence in its measure of future confidence vs the current component of the survey. In the just-released May survey, there was a 25 point gap between future and current confidence. This is a notable difference and a very strong indicator that the key ingredient necessary for economic recovery, namely confidence, is returning.
• A similar picture, although not quite as pronounced, was evident with the release of the UK’s Nationwide Consume Confidence index – whilst confidence levels at the moment are mixed, future expectations are far more optimistic.
• Whilst the S&P 500 Index has risen 39% since the beginning of March 2009, the volatility measure, the VIX Index, has fallen by exactly the same amount, confirming that for now at least, a degree of calm has been restored to global financial markets.
• The Coppock Equity Indicator has finally suggested a ‘buy’ signal is now appropriate or imminent in a number of global equity markets – this is a widely-viewed measure of long-term market sentiment.

Against this backdrop of a potentially stabilising global economy, stock markets gained further ground, with the UK actually being the main exception. Despite the encouraging US jobs data at the end of the week, the FTSE 100 Index once again failed to break through key resistance at 4,500, ending the week at 4,438.

Meanwhile FX markets fluctuated according to shifting perceptions of currency values. Sterling, which had been enjoying a strong recovery versus the US dollar and the euro in particular, turned sharply in the middle of the week having reached a 7-month high on Wednesday (3 June). The unfolding political upheaval hurt the pound and caused it to beat a hasty retreat from a high above 1.6650 vs the dollar on Wednesday to end the week trading below 1.5975 – rumours of the resignation of the Prime Minister, later proven to be unfounded of course, did not help the currency.

You can follow the impact of the unfolding political turmoil in the UK and the progress of economic recovery elsewhere in the world by logging in to your Barclays Stockbrokers account and monitoring the key indices, sectors and individual stocks that are currently attracting investors interest.

If you are an experienced investor prepared to accept a high degree of risk to capital and you wish to keep in touch with currency movements and participate in the global fx markets, the world’s biggest market, there are a number of products that you can use. From margin FX, to CFDs & FST and even covered warrants based on currencies, all are available through Barclays Stockbrokers. You should be aware that FX and CFDs/FST are high-risk leveraged investments and you can lose more than the amount initially invested and should not engage in this unless you are an experienced investor and are confident that you have the necessary skills.

Auto industry caught in recession’s headlights as oil prices look to speed away

The recession has taken its toll on the automobile industry. Bumped and dented from declining sales of new cars, many manufacturers, including international household brands like Chrysler and Vauxhall / General Motors, are in trouble. Takeovers and mergers are prevalent as companies try to steer themselves away from bankruptcy and the harsh knock-on economic consequences, particularly the natural fear of redundancies, and it is hard to see any immediate reason for cheer in the sector. Closer to home, even government intervention to trigger an uplift in new car sales, by way of the new scrappage allowance, has been greeted with scepticism in some parts and it remains to be seen whether this can be the stimulus for the industry to find a higher gear.

This is in contrast to the life blood of the automobile industry, oil, which has just seen its price hit a new high for the year of over $62/bbl. This follows rallying comments from Saudi Arabia, OPEC’s largest member, suggesting that the global economy has strengthened sufficiently to withstand a price of between $75 and $80 bbl. The Saudis indicated that they believe demand is improving and that their policy from earlier in the year, of not being aggressive in pushing an oil price increase, is shifting.

Follow the tracks of market impacts on the auto industry by logging into our Research Centre for all the latest market news, or why not look at a heat map risers and fallers in the LSE’s ‘Automobiles and Parts’ sector.

Or read our Investment ViewPoint on Oil, which looks at what fuels the price of oil and profiles ways to get investment exposure to the commodity.

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