Sunday newspaper round-up: Big downdraft, Tobacco, Services

22nd Jan 2012 17:17

Newt Gingrich pulled off a sensational victory in the Republican presidential race on Saturday by taking the South Carolina primary, wrecking the carefully-laid plans of Mitt Romney and setting the stage for a protracted contest. Gingrich, trailing badly behind Romney just a week ago, won after strong performances in televised debates on Monday and Thursday that forced Romney on to the defensive. Gingrich not only won, but did so with a convincing majority. Gingrich took 40% of the vote, Romney 28%, Rick Santorum 17% and Ron Paul 13%. Since 1980, the winner of the South Carolina primary has gone on to take the Republican nomination. But it is the first time since then that three different candidates have won the opening three contests, highlighting the fractured nature of the Republican party in 2012, The Guardian says. Tobacco may be a controversial investment but it has rarely been hazardous to your wealth. British American Tobacco and Imperial Tobacco have failed to beat the FTSE 100´s annual performance only four times since 1999. The total returns over the past decade are second only to mining, and with much lower volatility. But, recently, their defensive strength has shown signs of weakening. The largest concern among investors of late has been one of value. European tobacco stocks no longer look cheap, at 14 times earnings compared with a historic average of less than 12. Nonetheless, with cash flow secure and the Eurozone´s plight of little concern, few see much chance of a derating either. Over the long term, a question remains over what BAT and Imperial might do with the large sums of cash they generate. For some analysts one solution could be a merger between both outfits. Nomura believes BAT will not mount a takeover bid before 2013, but adds that, "the attraction for the deal is too high for it not to be worked on and got done -but not just now," the FT reports this weekend. For two years, markets have traded in a range, falling when risks of a systemic crisis rise, and rising when central banks juice the system with easier money. We are near the top of the upswing of one of those cycles, as the ECB´s move to bolster Europe´s banks has cheered up markets. There is no clear sign yet that we can break out of that cycle altogether. That implies that a big downdraft is not far away. But those who correctly espied that the reaction to the July US downgrade was overblown, and that the ECB´s move to help the banks would alleviate the Eurozone crisis for a while, have reaped nice profits. Kudos to them. Spotting such waves of sentiment was the way to make money last year. It will probably be the way to make money in the rest of 2012, John Authers writes in the FT´s Weekend edition. Wessex Exploration has avoided the squeeze on cash-strapped oil and gas exploration juniors. Its recent good fortune is thanks to a large offshore license area off French Guiana. September´s oil discovery there, described as "potentially transformational" by its operator Tullow Oil, has helped buoy both its and Wessex´s shares. (...) Investors seeking a purer bet on French Guiana without the drag of other major interests held by bigger partners may conclude that the only way is Wessex, according to the FT´s Weekend edition. Italian Prime Minister Mario Monti has called for the Eurozone to double the size of the region's permanent bail-out fund to help stricken states. Doubling the European Stability Mechanism's (ESM) firepower would reassure markets while driving down borrowing costs for the debt-wracked countries of the Eurozone, Mr Monti is said to have argued. Mr Monti had won backing for the proposal from European Central Bank President Mario Draghi, who proposed using unused money from the European Financial Stability Fund (EFSF) to boost the size of the new fund to about €750bn, according to reports in German weekly Der Spiegel, which cited unnamed sources. A spokesman for Chancellor Angela Merkel on Friday again ruled out Berlin boosting its contributions to the European bailout funds, The Sunday Telegraph reports. Private equity firms KKR, Permira and Sun European Partners are all separately poised to bid for Peacocks after Sun European secured a £10m deal to buy the retailer's Bonmarche arm in a pre-pack administration. Edinburgh Woollen Mill, the Scottish clothing group owned by Philip Day, is understood to lead the list of trade buyers interested in buying some of the Peacocks business. Tesco, the supermarket giant, is also standing in the wings, having registered its interest in taking over a slice of Peacocks' 563 shop estate if a buyer for the business as a going concern cannot be found. The sites will be used to expand its Express format. The race for Peacocks follows its collapse into administration on Wednesday under total debts of £750m. KPMG, Peacocks' administrator, is believed to be keen to receive initial bids by a week tomorrow at the latest, as the round-the-clock race to save Britain's biggest retail casualty since Woolworths gains pace, The Sunday Telegraph writes. A long-running legal battle resumes tomorrow at the High Court in London between Royal Bank of Scotland and US hedge fund Highland Capital over a called in loan. The bank is applying for an injunction to prevent the hedge fund from launching a $100m (£66m) lawsuit alleging fraud and unjust enrichment in the state of Texas, claiming British jurisdiction should apply. It follows an earlier judgment in RBS's favour at the High Court in December 2010 relating to a collateralised debt obligation (CDO) issued by Highland and funded by the Scottish bank in 2008. Although Justice Burton found in favour of RBS at the earlier hearing, he was highly critical of its behaviour. He accused RBS of a "deception" of Highland that allowed the bank to take advantage of accounting rules when calling in Highland's loans backing the CDO as collateral for the Royal's own loan, Scotland on Sunday says. Britain is tipped to take its first step towards a second recession this week when growth figures for the final three months of 2011 are expected to show the economy went into reverse. A majority of City economists believe there was a 0.1% contraction during the fourth quarter of last year although better-than-expected data for December has led to some optimism in recent weeks that there may have been zero growth. However, a raft of influential forecasters is warning of a significant dip, of 0.2%, which will mark the first step towards a technical recession. They say the GDP figures will be largely dependent on growth in the dominant services sector in November - for which official statistics will also be released this week. Philip Shaw of Investec is expecting Britain to stay in recession until the end of June. "The better news is that we expect the downturn to be shallow and reasonably short," he said, according to Scotland on Sunday.Over the December holidays the Tata-owned Jaguar Land Rover (JLR) factory at Halewood ran extra shifts to keep up with demand. An expansion to the facility, which could create 1,500 jobs, is reportedly under consideration and JLR is already building a new engine plant in Wolverhampton. Other car firms are enjoying similar success. As Britain's economy stumbles toward a likely recession, hopes are pinned on exports, particularly to faster-growing parts of the world. (...) Yet a decade of strong sterling has chipped away at the capacity of manufacturing industry?and factories cannot be rebuilt quickly. (...) A deeper concern is that Britain has become too dependent on moribund rich-world markets. The share of exports going to Europe has fallen in the past decade, but the continent still accounts for half of British exports. Thus, the emerging economies of Asia and Latin America seem a better long-term bet than Britain's established markets, but the combined share of British exports going to the three emerging-market giants?China, India and Brazil?is less than 5%. The recent success of Britain's car industry, however, suggests all is not lost, The Economist comments in its latest weekly edition. AB