The New Crude

By Heather D'Alton Dec 14, 2005

*** Blue chip index trades at 3-month high

*** Why the banking sector looks rather good...

*** Finding the new crude...the biggest risk of globalisation...why to avoid China...and more     

      -------------------   – How is it that despite a struggling high street and consumer services sector, the blue chip index managed to close at a three-month high on Friday? The FTSE 100 gained 0.6% during last week, to trade at 5,030 before the weekend – the fourth weekly gain for the index. The FTSE 250 traded 0.8% in the black, closing at 7,264.

– Whatever the answer, things look set to become a little more sticky for the market in the coming weeks. 'I think it will be difficult for the market to establish a clear trend as it continues to grapple with the issue of how much damage has been done to the consumer until we get some clear evidence one way or the other on that,' Morley's Martin Cawthorne said before the weekend. 'In the interim, it's likely to remain a stock pickers market.'

– As a stock picker, you'd have done well taking a closer look at oil companies and the banking sector on Friday. Both BP and Shell gained some 2% on fears of looming tropical storms, which could disrupt production in the US Gulf. Dated Brent inched up 10 US cents to trade at $51.69 a barrel this morning.

– Meantime banks did well: Barclays closed 2% up, while HBOS gained just over 1%. And there is potentially more upside to the sector...

– 'The bank sector is one where there are a lot of stocks on single-digit price-earnings ratios and yields of 5 percent, possibly more in some cases,' said F&C Management's Robin Woodall.

– With the launch of the world's largest air show in Paris today – which will feature Airbus's new giant, the 555-seat A380 plane – the rivalry between the European group and America's Boeing looks set to intensify. Yet despite dominating the industry since 2003, Airbus is currently losing increasing market share to Boeing.

– Moreover, BAE Systems, which holds a 20% stake in Airbus, has admitted that the delay to the new A380 is due to 'systems problems'. The group traded 0.5% up on Friday.

– And media group Reuters firmed 2% before the weekend, following earnings upgrades from broker ABN Amro. According to the broker, Reuters is not spending too much money on consumer-orientated products, as a number of critics are suggesting, and the group will continue to grow.

– Yet it's not all been plain sailing for Reuters: the information group received a barrage of criticism from private equity group Third Avenue for underselling Instinet's standalone brokerage business – the electronic broker recently sold to Nasdaq. Third Avenue has now offered $100m more to acquire the asset – without success. Reuters share price traded at 407p before the weekend.       

-------------------    – Investors who got into oil before it launched into its tremendous bull run are undoubtedly not complaining today. For the rest? It's time to track down an industry or sector positioned just where the oil price was before its upswing started. Such as agriculture, where, if anything 'remains cheap in this inflated world, then agriculture seems to be the prime suspect,' says the EdelweissFund team of Sage Capital. Mouths are 'open to be fed', yet we could be one 'bad drought' away from shattering the current complacency in the industry.

– What's the biggest risk of globalisation? That 'the new global macro could well give rise to a backlash against globalization,' says Morgan Stanley economist Stephen Roach. Why? Because 'mounting trade tensions are a very visible manifestation of how the body politic has lost confidence in the gospel of free trade and comparative advantage long espoused by most economists, including yours truly.' But the downside of such a backlash is not something that we can 'take lightly'...

– Three out of 10 Japanese companies operating in China are reconsidering any expansion plans they may have in the country, as business ties between the two come under increasing pressure. Why? Because China's anti- Japanese demonstrations from April have the Japanese worried. But those Japanese companies listed in China should be worried for a further reason: China's benchmark index has fallen some 15% since the start of the year, says MoneyWeek editor-in-chief Merryn Somerset Webb. For those investors interested in the Chinese growth story: beware. Japan and Germany look much better options.

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