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M a r k e t B u l l e t i nMONDAY 17 AUGUST 2010

Tel: 01437 766396Email: mark.burch@sjpp.co.uk

Website: www.burchwealthmanagement.co.uk

_This weekly Briefing Note aims to pick out some of thekey financial and economic issues touched on in the pressover recent days and from time to time includes the viewsof some of our independent fund managers.

Activity picks up

After a relatively quiet first week of the year for the FTSE100, last week saw an increase in trading activity andmarket rumour. The leading UK index retreated late in theweek from its 31-month high as commodity stocks wereundermined by Chinas decision to further tightenmonetary policy, causing the index to close the week at6002.03, still an increase of 1.7% since the start of 2011.Elsewhere, the US and Europe also saw gains of over 1%as, overall, equity markets concentrated on encouragingquarterly earning reports from the likes of Intel and J.P.

Morgan, rather than less impressive economic data such asan increase in US unemployment.

Last week also witnessed the beginnings of the first majortakeover tussle of the year, according to The SundayTimes . One of Americas biggest healthcare companies,Johnson & Johnson, is understood to be examining a freshtakeover approach for Smith & Nephew, the UK maker of hip and knee replacements, with the US firm looking toput together a revised bid worth at least 800p a share,valuing the UK company at around 7 billion. Not onlyhas this news put the Smith & Nephew board on alert, withit stating we are not engaged in any discussions which

could lead to a merger or takeover involving thecompany, but this woul d also test the coalitiongovernments determination to scrutinise bids by foreigncompanies; since after the sale of UK confectionerCadbury to the American foods group Kraft last year,Vince Cable announced a review into the shor t-termismof the City.

Johnson & Johnson, which has a market value of 109billion, has been encouraged by market reaction to thereports, with shares in Smith & Nephew rising to 750p onthe first trading day after the news was leaked; and withmassive cash levels of around $6.5 billion at its disposal,

the US company certainly has the financial firepower tolaunch a formal bid. It remains to be seen whether a formaloffer will be forthcoming but Richard Oldfield, manager of the St. Jamess Place High Octane

funds, sees it as a good acquisition for the US firm. Acompany like Johnson & Johnson continues to look greatlyundervalued, and it is odd that there should be such valuationanomalies at the larger end of the market. Within equity

markets, waves of enthusiasm and gloom sweep throughdifferent parts at different times, but we can see withreasonable confidence that this company will provide goodreturns over several years. While by no means finalised, thedeal with Smith & Nephew would increase worldwide sales,but if it doesnt go through as planned, it shouldnt change thelong-term prospects of the stock at all. There is no realdownside to the attempted acquisition.

British Petroleum

On Friday, BP unveiled a $16 billion share-swap that will seethe company issue new shares equivalent to 5% of its stock, in

exchange for a 9.5% stake in Rosneft, the Russian oil giant.The deal would potentially make the Russian company, whichis 85% controlled by the Kremlin, BPs largest shareholder.The deal is part of a wider alliance between the two companiesthat will see them explore for oil in the Kara Sea in theRussian Arctic (an area the size of the North Sea), as BobDudley, BPs chief executive, hailed it as a new model for co -operation between publicly traded companies and governmentoil companies. Looking to the future, Mr. Dudley has not ruledout Rosneft adding to its 5% stake if the project goes well,though it is important to remember that should everything goto plan, production from the region would not begin foranother ten years. It is unclear how existing investors will

react to the deal, which will see their shares diluted by theRussians , but the size of the issue means that no investor voteis required. The deal has been seen initially as a coup for theBritish oil company and a blow to US rivals such asExxonMobil, especially as it is believed that Vladimir Putinhas promised BP the most favourable tax treatment duringthe project. The announcement brought mixed responsesglobally as the share price rose 4%; but environmentalistsslammed the move into new exploration areas, while thereaction from the US was for politicians to express concerns;while The Sunday Times reported that Michael Burgess, aRepublican congressman from Texas, said, The nationalsecurity implications of BP America being involved with a

Russian company requires scrutiny.

The Sunday Telegraph opined that the planned Arcticexploration will allow BP to regain its global prominencefollowing the Gulf of Mexico oil spill which saw half of thecompany value lost in the space of months, although the share

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price has recovered around 70% since then. The paperreported that, nine months after the incident, thispartnership is seen as a statement that the company stillhas friends in the world and does not intend to give up itsposition at the forefront of deepwater drilling in the face of US hostility. The outlook for BP in America has improvedslightly, but remains uncertain. The publication of Barack Obamas oil -spill commission report savaged BP forfailure of management, but spread the blame among its

partners as well. The likelihood of BP having to pay outseveral tens of billions in damages has diminished as aresult, but the companys brand in the US remainstarnished in a market that was central to its growth plans,and it remains unclear as to whether it will be granted newlicences in the Gulf of Mexico.

Any salvation for savers?

This week, the Office for National Statistics is due toannounce its Consumer Prices Index figure for December,which was 3.3% for the previous month. It is fullyexpected that the inflation rate will rise even higher due to

the increasing price of petrol and utility bills, witheconomists believing that it will rise above 4% withinmonths. According to The Daily Telegraph , savings ratesare now so low that, taking these inflation figures intoaccount, there are only three instant access accountspaying a real rate of return, with the average accountpaying just 0.23%. However, data from the financialmarkets indicated last week that interest rates could rise byearly summer, following surprise at the steep rise ininflation. Most economists had not expected an increaseuntil the end of the year, and a rise in the Bank of Englandbase rate would end a two-year period of stability of ratesat 0.5% aimed at rebuilding the flagging UK economy.

Mortgage companies are already beginning to pull theirbest fixed-rate deals, with analysts seeing this as anothersign of anticipation of a rate rise; but some leadingeconomists are warning that the Bank of England musthold its nerve. According to a report in The SundayTimes , Ernst & Young is suggesting that inflation is beingtemporarily affected by rising commodity prices, and thatthe Monetary Policy Committee should keep base rateswhere they are until it is clear that the economy is takingthe fiscal adjustment in its stride.

A global problem

With inflation talk high on the agenda, The Independenton Sunday felt it important to emphasise that this was aglobal issue, and not just confined to the UK. While we areall too aware of rising oil prices, it was also announced lastweek that global food prices are now on average 32%higher than they were six months ago. In a developedcountry such as the UK, food generally accounts for

around 15 20% of household spend, whereas in most of theemerging world the figure reaches the heights of 50 75%;therefore a rise in food prices is felt much harder. This is oneof the factors that has already caused civil unrest in parts of North Africa, with several governments in the region takingsteps to control food costs. The Indian government has alreadyplaced a ban on certain vegetable exports, China has had to cutroad tolls for food transportation, and the Korean governmenthas actually had to take the steps of distributing emergency

stocks of meat, fish and vegetables. There are a number of reasons to believe this trend will continue, including a risingglobal population, a global shift towards more meat-eating,and the higher costs of fuel and fertiliser. While globally weare highly likely to adapt to increasing the food supply, thepaper warned that with the emerging world having moreimpact on global prices, food inflation may not be a short-termtrend. It is difficult to see an increase in UK interest rates as asolution to this global phenomenon.

Global inflation concerns seem to have taken over fromworries over the eurozone in global markets, with commodityprices rising again last week. The Financial Times reported

that several agricultural prices are now at 30-month highs andoil is pushing back towards the $100 per barrel level onceagain. Within Asia, South Korea and Thailand raised theirbenchmark interest rates, while China increased its reserveratio requirement for banks for the fourth time in two months.Closer to home, Jean-Claude Trichet, president of theEuropean Central Bank, felt the need to comment on theinflation problems (2.2% in the eurozone), which the marketsinterpreted as increasing the chances of a rise in eurozoneinterest rates. This had the effect of pushing the singlecurrency to a one-month high and its best week for a year.

But what does this necessarily mean for equity markets,

particularly in the less developed regions of the world? HughYoung of Aberdeen Asia, manager of the St. Jamess PlaceFar East funds, is relatively positive on the shorter-termoutlook, reporting recently, Economic growth in Asia appearswell underpinned in the next 12 months, having reboundedlast year to pre-crisis levels. Although inflation has risensteadily since mid-2009, it has stabilised in recent months.However, many central banks have been slow to normalisemonetary policy and their reluctance is due partly to the hugecapital inflows into Asia that have caused regional currenciesto appreciate. Policymakers also seem doubtful about theregion's robust recovery, concerned perhaps that the US andWestern European economies remain vulnerable. To us, it

appears that Asia is decoupling from its developedcounterparts, finding its own sources of supply and demand.Corporate sentiment is upbeat, which reflects not only thestrength of their balance sheets but also those of Asianconsumers. With corporate profits well supported and realinterest rates remaining low, the outlook for regional stock markets appears reasonably positive.

Members of the St. Jamess Place Wealth Management Group are authorised and regulated by the Financial Services Authority. The St. Jamess Place Partnership and the title Partner are the marketing terms used to describe St. Jamess Place representatives.

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