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Dubai Or Not To Buy

Author: Andy Betts Published: 30th November 2009 16:03

Andy BettsAndy Betts

Please do not hesitate to contact Andy Betts at Towcester Financial Planning to discuss any aspect of your financial affairs by e-mailing towcester-fp@sjpp.co.uk, or visiting www.towcester-fp.co.uk, or call 01327 354035. 

Andy Betts of local financial advisors, Towcester Financial Planning writes…

  • An explanation of the Dubai situation, and what it could mean for global markets.
  • Despite the volatility of last week, equity markets closed at around the same level as they started the week.
  • US Consumers flock to the sales with analysts hoping this will ignite the retail sector
  • Lloyds Banking Group asks its 2.8 million shareholders to pay cash for new shares in a £13.5 billion rights issue.
  • Ian McVeigh, lead manager of the SJP Jupiter Cautious funds, gives his views on the outlook for UK equities.
As always, please contact us to discuss how we may be able to assist you in enhancing returns on savings, investments or pensions.

Dubai or not to buy

Investors worldwide were reminded of the early part of 2009 this week as confidence was given a severe jolt as the possibility of debt default in Dubai added to the catalogue of financial stresses of recent times. Dubai World, the state’s flagship holding company, announced a restructuring, and asked creditors for a debt standstill. As explained in The Sunday Times, the crisis started when Dubai asked to delay payment on debt issued by Dubai World and its main property subsidiary, Nakheel. Many companies and high-profile projects have been increasingly dependent on Dubai for liquidity over recent times, and the problems raised fears that the world’s economic recovery could be thrown off course. Although the $59 billion of liabilities is a far cry from the estimated $2.8 trillion in writedowns by US and European lenders, the uncertainty rippled around the world. This triggered an immediate sell-off in equity markets, commodity markets and emerging market currencies in favour of ‘safer’ assets such as government bonds, the US dollar and Japanese Yen.

The Financial Times reported that, although the majority of market observers believe that the problems in Dubai are hardly insurmountable, what has been shown is how fragile markets are at the current time, as well as the fact that investor appetite for risk may not be as strong as previously assumed. However, according to the paper, this was not something that could compare to the Lehman collapse, and as such, should not derail the global recovery in any way. Indeed, there were signs on Friday that investors had digested the news and decided that the market fall was actually a buying opportunity.

Over the weekend, it emerged that Abu Dhabi was putting together a rescue package for its debt-laden Gulf neighbour, in an effort to restore relative calm, but warned there would be no blank cheque offered. The Sunday Times reported that Dubai was organising panic sales of some of its most high-profile assets,

including the QE2 cruise liner and Turnberry golf course in Scotland. In the past, Abu Dhabi has demanded control of Emirates, the state’s flagship airline, as the price of a cash injection. Dubai resisted, but its position was massively weakened after the events of the last week. Relinquishing control of such a high-profile asset as the airline would be a big blow to its global reputation. The Sunday Telegraph reported that Abu Dhabi has already provided $15 billion in indirect support through the UAE Central Bank and two private Abu Dhabi banks, but now may take their time to decide how much further help it is willing to offer.

Overall, despite the immediate reactions in the equity markets, the weekly losses were minimal. The FTSE 100 closed the week down 0.1 per cent, as the banking sector shrugged off any impact of Dubai’s problems, and despite the European markets suffering the biggest one-day falls in seven months, they still only finished the week down a barely noticeable 0.3%. The S&P 500 in the US closed broadly level over the same period. Lately though, it is Asian stocks that have been hardest hit, with concerns over Dubai adding to those over a potential Chinese asset bubble, with Japan in particular suffering a fifth consecutive weekly loss partly due to the increasing strength of the Yen harming their export companies. However, it was not just equity markets affected this week - commodity prices saw volatile swings as investors re-priced risk. Gold in particular continued its surge upwards, peaking at $1,194.90 per ounce on Thursday, before closing the week 2.3% higher than the level at which it started.

Give thanks for US Consumers
US shoppers flocked exuberantly to the stores on Friday for the traditional post-Thanksgiving sales, the second biggest shopping day of the year, with retailers opening as early as 3.00 am to cater for early-bird shoppers. When the final sales figures are confirmed, it could mark a significant moment for equity markets, particularly the retail sector, and The Sunday Times reported that the early signs are promising, even going as far as to opine that traditionally pessimistic retailers will soon find reason to cheer when the final results are tallied. US consumers are showing signs of starting to spend, and lower inventories will limit companies having to reduce their profits by discounting. With 25% of US homeowners in negative equity and unemployment in double digits, it may not seem the obvious time to see an increase in consumer spending, but this could be one of the first steps to full economic recovery. As reported in The Financial Times, retail analysts are already saying that sales figures will be similar or slightly above the levels of 2008, when the industry saw a 3.4% fall in sales against 2007. 
Lloyds rights issue
One of the common talking points in the weekend press was Lloyds Banking Group asking its 2.8 million shareholders to pay cash for new shares in the bank’s record £13.5 billion rights issue. Investors are being offered 1.34 shares for every share they own, at a discounted price of 37p. The raising of capital, which allows the bank to avoid the government’s insurance scheme for toxic assets, was approved at a shareholder meeting on Thursday. The deadline for buying the discounted shares is December 11, but investors may be subject to earlier cut-off dates through brokers. Views were mixed in the weekend press over whether this is a good deal for investors, with brokers in The Financial Times warning that by backing the largest mortgage lender in the UK, investors are betting on economic recovery, and some brokers suggested that investors may be better off selling their rights rather than letting them lapse. The Sunday Telegraph was more bullish than most, saying that investors should take up their rights and consider it a long-term investment given that ultimately, the UK economy will recover dragging the banking system along with it. The third and more balanced view was offered by The Mail on Sunday, who suggested that at first glance the offer is extremely tempting, but the upside is fully dependent on global recovery and the success of the merger with HBOS.
Battle against the banks
The Independent on Sunday reported that millions of consumers were dealt a crushing blow last week when the Supreme Court ruled in favour of the banks in the legal battle between the Office of Fair Trading (OFT) and eight banking institutions over the issue of unfair charges. The Court ruled that unarranged overdraft charges are not governed by fairness. Consumers are still able to pursue banks themselves, but with the OFT thwarted, any chance of success has essentially vanished and hopes of remuneration of up to £20 billion in overdraft fees have been dashed. According to The Sunday Telegraph, some 1.2 million claims against the banks have been on hold since July 2007 while this case was going through the courts. Now banks say they will start processing the claims again, but it is increasingly inevitable that the majority will be rejected. However, the paper argued that the ruling was actually a good thing overall for the vast majority of customers who do not borrow without permission and currently enjoy fee-free banking while in credit. The ruling apparently substantially reduces the risk of paying fees for all bank accounts and annual charges to run them, as is the case in so many countries worldwide.
Fund Manager View
Short-term volatility is a fact of life, and impossible to predict, and amid all the speculation of the last few days, it is important to remain focussed on fundamentals and long-term value. Ian McVeigh of Jupiter Asset Management is responsible for the UK equity element of the St. James’s Place Cautious Managed Fund and recently gave his views on the outlook for the market. “The last nine months have witnessed a sea change in investor confidence – the UK market is up some 50% from its low point in March. The strength of the rally has taken the majority by surprise and once again illustrates that, in terms of market timing, the stock market invariably delivers the worst outcome to the largest number of people. In other words, the vast majority of investors have missed out on this rally hoping to enter at a more favourable point, but I think they will continue to be disappointed. Our strategy remains intact – we positioned for a cyclical recovery so the banking stocks and mining stocks we own have done extremely well: the best buy was Barclays at 110p. Whilst I have trimmed some of the positions, my views are unchanged and we continue to maintain the same percentage of risk within the portfolio. So, for example, we currently have 20% of risk held in banks, 15% in miners, 10% in consumer stocks and 7% in pharmaceuticals.

“On the retail front I think we will see some change. Currently, retailers have little pricing power but with the property rental market changing – rents are falling – and with the failure of the weakest, the good players are finding they have less competition so will be able to increase profit margins. As to the banking sector, I take the view that regulators are shutting the door after the horse has bolted – recent rights issues have, in my opinion, put banks in an over-capitalised situation. This, coupled with the fact that they are likely to spend the next 5 years shrinking their balance sheets, means the current 15p of earnings for say Lloyds, is very distributable against current share prices. I think actually that bank share prices will double over the next two years. So whilst there are clearly problems, and providing there is no secondary crisis, then even if we witness a mediocre economic outcome equities should do quite well and the quality of profits will be very good so I am very optimistic”. 


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