Issue 72 | July 2009

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Uncertainty returns
UK Equity Market : FTSE All-Share last 6 months

Source: Bloomberg
The UK market: Uncertainty returns
Following a recent pattern, the FTSE100 index started the month strongly, reflecting the continuing upward momentum from investors’
greater risk appetite as economic data remained broadly positive rekindling hopes that the worst of the global economic downturn was
over. This mood persisted, taking the index briefly above the upper level of the established 4300 to 4500 range, despite the General
Motors bankruptcy. The UK Purchasing Managers Index confirmed that the UK economy seemed to be recovering much quicker than
expected with all sectors of the economy showing positive signs. However, having reached a five-month high, UK investors appeared
to take fright as the sharp recovery raised concerns over high commodity prices (especially crude oil, which has pushed petrol prices
back up above 100p per litre), persistent inflation levels and the spectre of higher interest rates. Thus in the middle of the month the
equity market had difficulty making any further progress. In the second half of June, equity markets weakened sharply as uncertainty
returned, triggered by downgrades to growth forecasts and generally cautious comments over global economic prospects from the
World Bank, central bankers and the IMF. In essence, the prevailing feeling was that markets had run ahead of themselves. With risk
aversion resurfacing as investors worried over the sustainability of the green shoots, and recent economic data offering no directional
help, markets will be quite releaved to retain current levels as we approach the end of the second quarter.

Sector Performance during June

Top 5 % Bottom 5 %
Fixed Line Telecommunications + 10.2 Industrial Engineering - 9.2
Technology Hardware & Equipment + 6.7 Banks - 8.5
Leisure Goods + 4.4 Oil & Gas Producers - 8.3
Personal Goods + 4.3 Forestry & Paper - 8.1
Pharmaceuticals & Biotechnology + 4.0 Travel & Leisure - 6.3
Source: FTSE International Limited

FTSE 100 Company results due in July and August

Company Date due Type of result Company Date due Type of result
Autonomy Group 16 July Interim Barclays 6 August Interim
GlaxoSmithKline 22 July Interim Cobham 6 August Interim
Capita 23 July Interim Inmarsat 6 August Interim
Pearson 27 July Interim RSA Insurance 6 August Interim
BP 28 July Interim Schroders 6 August Interim
BG Group 29 July Interim Standard Life 6 August Interim
Cadbury 29 July Interim Thomson Reuters 6 August Interim
Reckitt Benckiser 29 July Interim Unilever 6 August Interim
AstraZeneca 30 July Interim Friends Provident 11 August Interim
BAT 30 July Interim Intercontinental Hotels 11 August Interim
BAE Systems 30 July Interim International Power 11August Interim
BSkyB 30 July Interim BHP Billiton 12 August Final
Centrica 30 July Interim Prudential 13 August Interim
Reed Elsevier 30 July Interim Rio Tinto 18 August Interim
Rexam 30 July Interim ENRC 19 August Interim
Rolls Royce 30 July Interim Amlin 24 August Interim
Royal Dutch Shell 30 July Interim Bunzl 24 August Interim
Smith & Nephew 30 July Interim G4S 24 August Interim
Liberty International No date Interim Admiral 25 August Interim
Antofagasta 26 August Interim
Anglo American 3 August Interim Cairn Energy 26 August Interim
HSBC 3 August Interim Serco 26 August Interim
Legal & General 4 August Interim Tulow Oil 26 August Interim
Standard Chartered 4 August Interim AMEC 27 August Interim
Xstrata 4 August Interim Diageo 27 August Final
Lloyds Banking Group 5 August Interim Kazakhmys 27 August Interim
Old Mutual 5 August Interim Drax No date Interim
Shire Pharmaceuticals 5 August Interim Hammerson No date Interim
Aviva 6 August Interim WPP No date Interim
Source : Companies
Economic Indicators due in July and August
Announcement Date
ECB interest rates 2 July and 6 August
UK interest rates 9 July and 6 August
UK Consumer Price Index (inflation) 14 July and 18 August
UK employment figures 15 July and 12 August
Eurozone Consumer Price Index (inflation) 15 July and 14 August
US CPI 15 July and 14 August
Monetary Policy Committee meeting notes 22 July and 19 August
UK retail sales 23 July and 20 August
US interest rates (FOMC) Next on 11 August

Housing market : approaching a turning point ?

Both the two main UK house price indices have shown an improving trend since February 2009. The Nationwide index revealed a
rise of 1.2%, month-on-month, for May, compared to a decline of 0.3% in April (and a rise of 1% in March), with the annual change
rising from a fall of 15% in April to a decline of 11.3% in May on the same month a year ago. The Halifax index, however, recorded
a much bigger rise of 2.6% in May, but this followed declines in the previous three months, this reduced its year-on-year fall from
17.7% in April to 16.3% in May – the latter figures are based on quarterly year-on-year numbers, which give a better picture of
underlying trends. Both sources comment that it is dangerous to put too much emphasis on any one monthly figure, as they tend to
be fairly volatile. The three-monthly series of data are, therefore, viewed as a better indicator of trends in the market as it smoothes
out fluctuations. Here the Nationwide series has fairly rapidly improved from declines averaging around 4.9% in the second half of
2008, to just over 3% in the first five months of 2009, and a fall of only 0.5% in the three-months to May over the previous three-
month period. The Halifax index’s three-month on previous three-month figure showed a fall of 3.1% in May, which was also a
significant improvement on the average 5% to 6% declines seen in the period June 2008 to January 2009.

With average house prices moving up from the low point in February this year, the peak to trough figures from the Halifax – from peak
in August 2007 - was 22.5%, and the Nationwide – from peak in November 2007 – was 18.4%. Both organisations were predicting
further falls this year of around 6% from the trough levels. In view of the latest data these peak-to-trough forecasts are looking
increasingly pessimistic, although there will undoubtedly be further declines in values in individual future months. Nevertheless, the
media has been full of optimistic commentary following the rises in the monthly indices, predicting that the UK residential market could
be at, or approaching, a turning point. While short term data are generally unreliable, and liable to volatility, particularly at a time when
numbers of transactions are far below normal levels – the Land Registry commented that turnover was some 60% below long-term
averages – leading to unreliable statistics, there are, nonetheless, strong signals that the rate of decline is slowing, and maybe
approaching stability.

The main reasons behind the more optimistic outlook for residential property include an increase in buyer enquiries, a gradual easing
in the credit situation, and the limited supply of new property onto the market. The lack of supply of property is a result of potential
vendors, who are able to, holding back until prices improve, together with fewer forced sellers as a result of low interest rates,
government intervention and lenders’ improved forbearance on outstanding payments. Despite the continuing poor outlook for the
UK economy, and in particular, the expectation of a continuing rise in the unemployment figures – from currently around 2.26m (7.2%)
to perhaps three million by the end of 2009/early 2010 – both the Bank of England and the Council for Mortgage Lenders (CML)
confirm that the level of mortgage approvals is continuing to rise, albeit erratically and from historically low levels. The Bank of England
said that the number of mortgages approved in the first quarter of 2009 had risen by 19% over the previous quarter, while the CML

Nationwide house price index Enquiries & Mortgages

% change

Source: Nationwide Sources: RICS, Bank of England, Capital Economics

commented that lending was only a third of the average level of that between years 2002 and 2007, and half that at the start of 2008
as house values started to decline. Lenders, however, remain highly selective in their lending criteria, with the best interest rate deals
only available to buyers with substantial (25% and above) deposits, effectively excluding most first time borrowers - a vital dynamic
of the market. For a ‘normal’ or neutral market to operate, it is estimated that the number of new mortgage approvals needs to
roughly double, assuming the supply of properties also improves to provide a reasonable level of choice. Despite the increase in sales
(from very low levels), the recent rise in prices largely reflects the improvement in availability of credit combined with the static supply
of property. This has resulted in a narrowing in the gap between asking price and agreed sale price to between 7% and 10%.

Amongst other encouraging data, the Purchasing Managers Index (PMI), which measures business-to-business activity in
manufacturing, construction and services, revealed an improving picture over the past few months, and is now at a level indicating
economic expansion. While the relationship between PMI and economic growth is less precise than usual, the commentary believes
that a return to growth could now be happening a year after the economy went into recession. Many economists agree that the
indications are that the worst of the UK recession is now over. The respected National Institute for Economic and Social Research
thinks that economic growth returned in April and that the second quarter GDP could be flat, after a 1.9% contraction in the first
quarter. Analysis of the first quarter GDP showed that the contraction was largely due to the run down in inventories (with little
restocking), while business investment and exports were not as weak as first thought. These factors point to the UK economy being
further through the economic cycle than previously thought, and underlines the possibility of growth in the third and fourth quarters
as the positive effects of the huge fiscal and monetary stimulus, low interest rates, reduced VAT and a sharp fall in commodity prices
combine to boost household and business spending. The major concern is that all these factors, and the necessary restocking, will
provide only a short-term boost to the economy, and that the recovery will not be sustained through 2010, potentially leading to a
second downturn in growth – thus a ‘W’ shaped recovery rather than the hoped for ‘V’. It may be that the current improvement in
the housing market is mirroring the economic recovery pattern, driven by a rise in demand, a shortage of new housing stock and
relatively cheap credit. Certainly the decline in residential values, and interest rates at historic lows, has improved affordability, with
the percentage of earnings used by new borrowers to pay an average mortgage over disposable income declining sharply from a
peak of 48% in Q3 2007 to around 31% in Q1 2009. The long-term (25 year) average is estimated to be around 37% of earnings.

However, the combination of rising prices encouraging reluctant vendors to put properties onto the market, increasing supply, the
prospect of higher interest rates in the medium term (as economic growth returns and inflation rises) making credit more expensive
(lenders are already increasing the cost of longer term fixed rate mortgage deals), at the same time as unemployment is at its peak,
are likely to adversely affect affordability. Thus the outlook for residential values remains highly uncertain. While we expect values to
rise in the short term, by early 2010 the adverse factors mentioned above are likely to result in values finding it much harder to make
progress, and may result in some declines particularly as uncertainty over job security and earnings growth undermines confidence.
Longer term the lack of supply of new property, particularly in London and the South East, should result in stability and then the
resumption of average long-term growth rates, provided that availability of credit returns to more ‘normal’ levels.

As usual there will be no August Newsletter.

First Equity Limited

Salisbury House, London Wall, London EC2M 5QQ
Tel: 020 7374 2212 Fax: 020 7374 2336
Website: www.firstequity.ltd.uk
Paul Henry
email: paul.henry@firstequity.ltd.uk

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guarantee as to the accuracy or completeness of the information. The newsletter is not intended as a solicitation to buy or sell any
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