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Home | RARE Infrastructure Market Commentary: July 2009

RARE Infrastructure News

RARE Infrastructure Market Commentary: July 2009

August 12 2009

In the May factsheet we mentioned “pigs can fly”, and in July they visited the RARE offices with our Head of Retail Distribution, Matt Dell, contracting swine flu. Despite swine flu increasing around the world, it did little to dampen global markets. The S&P 500 had its best 5 month streak since 1938. Developed world markets (MSCI World, local) were up 7.7% and Emerging Markets (MSCI EM local) up 9.5% in July.

Out of 376 companies in the S&P 500 that have reported Q2 numbers 287 (76%) have beaten expectations by an average of 10%. This is a combination of earnings expectations getting beaten down, and management slashing costs (employment, replacement capex, travel, advertising, etc.). Generally revenues fell so earnings upside was not supported by consumer spending.

These upside results were mirrored in other parts of the world, and combined with better credit conditions helped support the rising equity markets.

BUT, what is on our minds as we look to the future?
* Short term we think equity markets may have run ahead of themselves. For markets to continue rising requires consumer confidence to increase, and for this to occur, we believe there needs to be a material turnaround in US unemployment. Consumers will not spend until they feel confident in their employment prospects.
We believe,
* that the current expansionary fiscal policies will eventually lead to higher inflation, despite the so-called ‘output’ gaps; and
* that a major fiscal tightening designed to reign in expansionary government budgets will create subdued economic growth in future years.

The most relevant events that occurred in July, from an infrastructure perspective, were
* Ferrovial (Spanish Infrastructure / construction company) that owns British airports and tollroads (through their 68% shareholding in Cintra) finally announced details on its merger with Cintra, which was more favourable to Cintra than investors had been expecting. On the day of the announcement, Cintra was up around 20%
* US House of Representatives passed legislation for a cap and trade CO2 scheme from 2012. RARE believes this is a very positive development and some companies in our investment universe will benefit directly and indirectly from such a scheme.

Richard Elmslie & Nick Langley,
Senior Portfolio Managers