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Suffering Storm Damage
By Justin Urquhart Stewart 29/08/2007 00:00
As the unfortunate population of Jamaica and Belize will attest, meteorological storms cause far more immediate physical damage than financial ones. However, as we will identify over the next few weeks, financial storms do also cause considerable losses but their effect and impact may not be so obvious.
As I am writing, rumour, hearsay and tittle-tattle is flying around about which banks and hedge funds have been hit hardest. Given the speed of events, I will leave comments on this to others with far more erudite and expert brains than I.
So on to the next stage. Will there be an impact on the wider economy? Well frankly anyone who thinks that this is a completely separate and isolated issue is obviously descended from King Canute’s advisors on tidal flows. Of course there will be, and in fact there has already been, an impact. Some companies have already seen credit lines cut and new facilities becoming tighter. That in turn will affect areas such as capital expenditure and investment plans (and thus in due course employment). We have also started to see some effect on company payment schedules as companies squeeze the system to maximise their cash flow and, as ever, it will be the small company at the end of the food chain that will suffer the most.
Funding also for mergers and acquisitions has also been affected and the flood of the last twelve months will likely be a drought for the next period. This will not just impact the companies themselves but some might wish to shed a crocodile tear for those investment bankers who lorded their way around the City over the past few years.
As for the retail economy, the signs are clear. Last week’s news of the failure of the music and DVD chain ChoicesUK is the just the latest in the line of a tale of woe in a sector which is being squeezed by both retail weakness and a fast changing technology which effectively undermines their main business proposition. Before ChoicesUK we have seen others including Fopp, MVC and MusicZone all go the same way. The increased cost of credit and mortgages will only turn this screw further for other weaker retailers.
***
So the barbarians had scaled the walls and occupied nearly a third of the fortress but they couldn’t break into the keep. Yes, the London Stock Exchange (LSE) has finally seen the barbarians suffer the humiliation of withdrawing their forces as NASDAQ sought to sell their strategic position in LSE. Perhaps they too have been a victim of the credit crunch as that heavily indebted exchange probably found the cost of its financing rising rapidly.
Their attention has now been drawn to the Nordic Exchange OMX, which although I am sure is an excellent exchange, is hardly of a similar calibre or influence as the LSE. However, here too the barbarians are likely to be foiled as their bid (saddled with yet more borrowings) may come up against that old fashioned alternative known as ‘cash’ coming from an exchange with a better credit rating. This cash may well come from the Dubai Exchange who has been keen to expand its influence into Europe. For NASDAQ however, they have had a torrid venture overseas compared to NYSE and its purchase of Euronext. I suspect they may well now go through a period of introspection and, no doubt, some significant changes.
However, for the LSE this really is, to use a corny phrase, a new dawn. Freedom from the besiegers provides them with a great opportunity to lay out their strategy and ensure that they wrap in some new and more reliable shareholders who share their vision for the future.
So what may come? Well the “co-operation” agreement with the Tokyo Exchange may give a clue but as Tokyo has yet to demutualise, it would be extremely difficult to effect any full merger. Maybe, however, further and more sold linkages with Hong Kong and Mumbai would be logical. The announcement last week to allow mainland Chinese investors to start investing in Hong Kong is an interesting move that could lead to some further very significant developments in that market.
Come on LSE – your time has come – again!
***
Speaking of China, perhaps it is a time to cast a timely warning here. Whilst much comment has been made that China has been unaffected by the credit crunch, there are other concerns within this booming economy. The “China Price” is often the term for the cheapest price of a widget in the world and thus, as China has usually been the cheapest source for just about anything manufactured, it has been a suitable term. However, things are changing. Whilst we may be worrying about credit, they are worrying about inflation.
With growth running at 11% there is concern about economic overheating and with inflation at 5.6% against a target of 3%, the problems are building up. One action already taken has been to hike up interest rates again, with the deposit rate now at 3.6% and the lending rate at 7.02% - but that may not be enough.
Inflationary pressures seem to be focussed on food prices which have risen by 15.4% (apparently pork has shot up by 86%) and wage rises in the first quarter which are up by an inflation busting 21%. Add to this the removal of various tax subsidies that were imposed on certain exports and we can see that the effect of this has been that Chinese greatest export over the past decade, Deflation, is now being replaced by its latest export - Inflation. The “China Price” is rising and that too will flow directly into our economies, pushing prices up.
So investors should not see China as either being separate or immune to the other credit issues around the world and certainly their own problems will be impacting on us. A problem for the Chinese economy will also be our problem
***
And finally….more from the “PC gone mad” file. A female pensioner from Wiltshire has been formally banned from looking after the local village flower bed unless she fulfils the correct health and safety rules. She must display a “Men at Work” sign, wear a high visibility jacket and have a traffic look-out.
Also on a personal note, I must own up for apparent misbehaviour. Four middle-aged gentlemen (including the writer) with their wives on a Eurostar train from Paris were told to shut up by a youngster, for making too much noise. Who worries about hoodies when they are unnerved by wrinklies? Does that mean I qualify for an ASBO?
Have a good week,
Justin A. Urquhart Stewart
Director
Seven Investment Management
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