Scrutineer: Long and short of recovery

Published on Tuesday 1 September 2009 20:58

THE latest raft of data makes clearer than ever that UK economic recovery is most likely to be pedestrian and spasmodic.

Even before the latest figures, we were lagging some eurozone economies in the speed of recovery .

But the relapse in manufacturing activity last month, the sharp fall in business lending and consumers paying down debt rather than consuming, all take the legs from under any hopes of a V-shaped recession.

Take in the leisurely improvement in the housing market and what you are left with is a clear picture of virtually nothing going anywhere fast, economically-speakiing.

That we are past the worst seems beyond dispute. Banking is out of intensive care and able, with a taxpayer cash-infusion in some cases, to manage a convalescent walk around the hospital grounds.

But it will take years to rectify the damage of the banking industry's madness and restore it to full health. That will colour the pace and strength of any wider British recovery.

As far as the economy is concerned, we are not seeing a succession of false dawns. The data just shows more realistically refined greyer dawns.

Each fillip of hope is real enough, all right. But we are desperately trying to read too much into any promise of better times.

Then, as with the Chartered Institute of Purchasing and Supply's activity index yesterday, we receive a douche of cold water for our pain. The index registered 49.7 in August – below the no-change 50 mark and signalling a modest contraction after July cheered us up with the first growth in activity in the sector in 15 months.

This does not mean manufacturing's incipient recovery is derailed. But it is evidence of its likely continuing fragility.

It certainly dented the sectoral optimism provided by steelmaker Corus' announcement last week that it would restart production at its Llanwern works in Wales because of a rise in the price of steel.

It will remain a bumpy road whether sterling remains at its relatively export-friendly levels or not.

But, taken with the unsurprising news that consumers still believe it is more important to lower their personal indebtedness rather than try to stimulate the economy (there's a surprise), and the uninspiring news on business lending, the effect was to make many commentators wonder whether they had been over-egging the prospects of recovery.

Even given that, the general summertime economic data which has so much helped to revive spirits in the stock market means the balance of probabilities is still that the UK economy probably expanded in the third quarter for the first time since recession set in late last year.

But yesterday's news – including the sharp fall in business lending in July – shows that is not really the point.

As many have said, there is technical recession and man-in-the-street recession.

Even when we are technically out of recession it will not mean we are out of the woods by any means.

Unemployment will continue to rise for a while, and a stagnant rather than slowing economy will not put any great wind in the sails of the high street. In fact, a separate survey yesterday suggested the retail sector will feel the worst of the pain in 2010 as unemployment continues to rise post-recession.

BDO Stoy Hayward predicts 5,000 retailers will actually go out of business, having been kept partly afloat by employers limiting redundancies through reduced hours and wages.

I have not seen retail trade bodies rushing to protest that these doomy scenarios are overcooked. Mortgage-lending will improve, as it is now, but look at from what bombed-out base. Ditto housebuilding.

In some ways, it would be strange if this stop-go recovery was any other creature. We have been in the worst recession since the Second World War brought on by the worst financial crisis since the 1929 Wall Street crash.

A V-shaped recovery from that scenario would have defied all logic, would have defied even the experience of the 1974-5 and 1980-1 recessions, which were very bleak in themselves but not in this cataclysmic class.

The stock market, normally six to nine months ahead of economic events as greed replaces fear as the dominant investor emotion, has been pricing in recovery since last spring.

But, periodically, there have been market reverses as investors have switched back from cyclical stocks to "defensives" on some sudden returning worry.Then the recovery in investor optimism has continued again.

The same pattern is likely to be true of the underlying economy. Yesterday's figures, most notably in manufacturing, show that there is still capacity for unpleasant surprises to the system but without changing the general economic upturn.

The cumulative effect of such "contradictory" nuances to the up-and-down data is probably to make reluctant realists of us all.

Neil Veitch of SVM

ONE TO WATCH

Pace

216p -2.7p

Scotsman says BUY

PACE, the manufacturer of set-top boxes, has undergone a dramatic transformation over the past five years.

While investors may recall with horror Pace's rapid ascent and equally dramatic decline following the bursting of the technology bubble, the new management team, led by chief executive Neil Gaydon, has put the business on a much sounder footing. By streamlining development and manufacturing, the company's profitability has been improved.

Pace's renaissance was complete when it acquired the set-top box business of Phillips. This transformed the company from being a relatively minor player into the third-largest producer in the world and also helped deliver economies of scale.

Pay-TV providers, such as BSkyB, are continuously developing their products in order to retain customers. Technological advances all require customers to buy replacement set-top boxes. While pay-TV offerings are fairly well developed across the western world, the degree of sophistication varies dramatically between countries.

In the UK, only 14 per cent of Sky subscribers have high definition television, with levels substantially lower in continental Europe and virtually nothing in the developing world. Similarly, while PVRs are reasonably well developed in the US and UK, they are virtually non-existent in Europe. These trends should enable Pace to continue to grow.

In addition to their attractive growth profile, Pace has cash on the balance sheet that will enable it to pursue technology-focused acquisitions should any become available. Even after a very strong performance during the year to date, we continue to believe Pace represents an interesting investment opportunity.

&#149 Neil Veitch is an investment manager with SVM Asset Management. This article is for information and discussion purposes and does not form a recommendation by the manager to invest or otherwise.

Edinburgh investment bank lifted by Submersible sell-off

SCOTS STOCKS

QUAYLE Munro, the Edinburgh headquartered investment bank, surged to an 11-month high yesterday after an oil and gas business in which it had a 49 per cent stake was sold for 16 million.

The Aim-listed company said proceeds from the sale of Submersible Technology Services – "one of a number of private company investments" the group holds – would be used to improve its liquidity. Shares surged 100p or 16 per cent to 725p, its highest this year.

Elsewhere most Scottish shares were down in line with the wider London Stock Exchange.

Oil producers dropped despite firming crude prices.

Cairn Energy, which has finally begun production from its giant Indian fields on Saturday, closed 98p lower at 2,409p. Dana Petroleum also lost ground, ending the day 4 per cent off at 1,352p. Venture Production closed down a penny at 843.5p as its predator, Centrica, increased its stake to more than 70 per cent.

Menzies, the Edinburgh logistics group, bucked the downward trend. After reporting better than expected trading last month shares have been surging, closing up another 4.1 per cent at 340.25p.

Clyde Process Solutions, the East Kilbride engineering group, rose 3p to 48.5p after reporting resilient first-half trading.

Carbon credit firm must decide whether to go Dutch

SMALL BUT BEAUTIFUL

ECOSECURITIES, the Aim-listed carbon credit company, has until 18 September to mull over a hostile takeover bid from Dutch firm Guanabara.

Guanabara yesterday raised its offer terms from 77p in cash per EcoSecurities share to 90p per share.

Last month, the board of EcoSecurities recommended that its shareholders reject the 77p bid after branding it "wholly inadequate".

Eco-Securities, which is based in Dublin and has a market cap of about 95 million, listed on Aim in December 2005.

Guanabara's latest offer values the firm at 106m.

Pedro Moura Costa, Guanabara's chairman, was one of EcoSecurities' founders and served as its president until he resigned on 23 April.

Guanabara said shareholders holding about 25.53 per cent of EcoSecurities' issued share capital had accepted the offer and lowered the threshold for the offer to be declared unconditional to 80 per cent.

Three bidders have expressed an interest in taking over EcoSecurities so far this year, with its shares almost tripling in value.

The company creates and trades in certified emission reduction credits and manages the largest number of emission projects overseen by the United Nations.