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1 Gracechurch Street, LONDON. EC3V 0DD. Tel: +44 20 7337 3500 Fax: +44 20 7929 0454 A global economy still produces localised investment conclusions Dr.

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Presentation on theme: "1 Gracechurch Street, LONDON. EC3V 0DD. Tel: +44 20 7337 3500 Fax: +44 20 7929 0454 A global economy still produces localised investment conclusions Dr."— Presentation transcript:

1 1 Gracechurch Street, LONDON. EC3V 0DD. Tel: +44 20 7337 3500 Fax: +44 20 7929 0454 A global economy still produces localised investment conclusions Dr Savvas Savouri Managing Director QuantMetriks Research Ltd

2 UK The MPC’s ‘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, don’t rule out the next move in UK rates actually being downward The UK’s 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. Don’t dismiss miners too easily UK based Manufacturers: operating margin UK based Retailers: operating margin

3 Europe Whilst Germany’s 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-zone’s 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. German based manufacturers versus retailers: operating sales, € German based manufacturers versus retailers: operating margin

4 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 currency’s, 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 US based Housebuilders: operating margin US based Manufacturers: operating margin

5 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 Japanese based Manufacturers: operating sales, ¥ Japanese based Manufacturers: operating margin

6 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), China’s 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 China’s non-farm payrolls NEED to grow at c10% each year Since its domestic consumer base cannot yet deliver 10% growth, and given the Yuan’s 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 China’s post 2001 economic growth story Investment conclusion. The almost certain sell off in the UK’s 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

7 Sourced material for this presentation Global – China from 2001: a play in three acts, June 9 th UK – Who’s the banker in the black?, May 2 nd Global – Good years ahead for mining equipment manufacturers, March 15 th Global – What is going on in metals?, March 13 th Japan – Re:cover-every exit, March 2 nd UK – Buying into the Nickell story, February 21 st Europe – Mid cap industrials, February 9 th US – Inflation: You ain’t seen nothing yet!, January 26 th US – Desperate households, October 14 th 2005 Global – G3 economies, Capital recoveries?, August 25 th 2005 Global – Why China cannot afford a panic retreat from the US treasury market, August 17 th 2005 US – Counting up to $ depreciation – Yuan to free, July 26 th 2005 Each note is available on request ( in either hard copy or electronically. No

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