Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 3/5/11

with one comment

Blogging will be very light over the rest of this month as I’m going to be on holidays for most of it. Since my last update equity markets have been flat-to-marginally-down, and given the near-term economic headwinds I’ve previously highlighted I wouldn’t be surprised to see them lower by the time I return from my trip. On this note, I was interested to see that Sarasin in Zurich is advising clients to take some risk off the table.

(Disclaimer: I’m a shareholder in both Uniq plc and Ryanair plc). Turning to the Irish corporates, there was a bit of newsflow around, with Greencore reported to be contemplating making a bid for fellow UK-based food producer Uniq. I’ve previously noted the need for consolidation in the UK food manufacturer space – where the fragmented nature of the industry means that large retailers such as Tesco and M&S can squeeze their suppliers’ margins – and a tie-up between Greencore and Uniq would be a clear positive for the sector. From Greencore’s perspective Uniq would enhance its already strong position in the sandwich market (thus giving rise to potential synergies), while Uniq’s customer base appears to be complementary to Greencore, so no cannibalisation of sales is likely to arise from a transaction. In addition, it would answer the “what now?” questions that arose after Greencore recently failed to acquire Northern Foods. In other news, the Irish government signaled that it wouldn’t entertain another bid for Aer Lingus by Ryanair.

The commodity markets have been volatile in recent days, with silver particularly ropey after the CME raised the initial margin by 13% to $14,513 per contract. Margins were $4,250 a year ago. Last month I wondered if “silver has had its move for now“. It’s dropped by over $3 an ounce since then, so I guess it has!  I know that quite a few of my readers are interested in gold – and one of them asked me about the reasons investors have for buying gold while quantitative easing is ongoing, as opposed to buying if after QE2 ends next month. An excellent question, and one that I answered as follows:

QE has created a tsunami of money that is being invested into all categories of risk assets – the return on cash is so low that people chase higher returns from equities, commodities, you name it. When QE ends there will be nervousness that the riskiest assets like equities will struggle (as they did between QE1 & QE2), so investors may be willing to move their money into gold (which rose in the interregnum between QE1 and QE2). There is a view in the markets that the price of oil and gold (which are both $ denominated) is rising at this time to compensate for $ weakness, so in addition to being seen as safer than equities some investors may view gold as a hedge against $ declines.

Turning to sovereign issues, I was interested to see that Deloitte & Touche say that they see UK rates on hold until 2013. It will be interesting to see if inflation rolls over as D&T expect it to, personally I’m unconvinced that it will given how loose monetary policies have been in the UK and elsewhere, such as the US (see this excellent op-ed for a primer on what the Fed is up to). But perhaps the UK economy might be helped by extra sales of this sort of thing (!).

This is an excellent investor letter by Bill Gross at Pimco – “There should be little doubt that simply holding Treasuries at these yield levels for an extended period of time represents an abdication of responsibility“. I agree.

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Written by Philip O'Sullivan

May 3, 2011 at 4:46 pm

One Response

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  1. […] the FT has a good article here, while I previously wrote about the logic of a Greencore-Uniq tie-up here. This is the second UK plc in my portfolio (after Chaucer) that has agreed to a takeover this year, […]


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