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Home > Investments > UK

Strong balance sheets rule

Watch out for companies that flex their financial muscle

By George Luckraft | Published Jul 23, 2012 | comments

Economic data has generally been disappointing around the world in recent weeks, prompting analysts to reduce their forecasts for companies’ earnings for the second half of 2012.

The lack of growth has also led to policy easing by a number of central banks, most recently South Korea and Brazil, where rate cuts followed those of the European Central Bank and the People’s Bank of China this month.

China’s preliminary estimate of its annualised economic growth in the second quarter – 7.6 per cent versus a year ago – was more or less in line with investors’ expectations. However, given that China’s economy is evidently still slowing, hopes have risen that Chinese policymakers could take further action to promote growth. Elsewhere, recent Federal Reserve minutes showed that some US policymakers also believe further stimulus may be needed in coming months to support the US labour market.

Italy and Spain’s government debts continued to worry investors. Yields on both countries’ sovereign debt rose to levels generally believed to be unsustainable. At the same time, the recapitalisation programme for Spain’s banks is wending its torturous way through the relevant EU institutions.

Adding to the gloom, French president François Hollande is raising taxes due to slower than expected economic growth via a €2.3bn (£1.8bn) one-off levy on households earning €1.3m or more a year. He has also announced a special tax on large banks and oil companies which is forecast to raise a further €1.1bn. Plans to tax households with second homes in France may also affect individuals domiciled elsewhere who own French property.

UK economic data is likely to be severely distorted by the impact of the Jubilee holiday, the Olympic games and, most recently, the heavy rain and flooding. So we are not expecting a very clear picture.

In spite of this, equity markets rose in June, after a dismal showing in May, mainly on hopes for further action by various governments, as discussed. It could also have been because many felt that much of the bad news was already known and therefore was priced into current valuations.

Commodity markets have offered some support to beleaguered investors in that, in the past three months, there have been some significant declines in their prices, most noticeably in the crude oil price. This is always useful as it puts money back in the pocket of western consumers. Nonetheless, this has masked an issue in soft commodities such as corn, soya and wheat. Hot weather in the US has led to failing of entire crops in the worst-affected states, which is pushing up the prices of these crucial commodities. It is worth noting that such price rises last year accompanied the unrest of the “Arab Spring” and that we could see such events happening again.

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