The global investment markets are changing shape. Equity markets still seem to be shrinking and the bond markets still growing and, of course, along with these we have seen the proliferation of a range of other asset classes some of which have never been properly utilised before. However, as we are at the beginning of 2007 it is worth reminding ourselves that although the investment world has changed the investment disciplines and rules still remain the same. Despite all the brouhaha over launches and innovations there is still no magic investment potion or killer application which will solve all investors’ problems. Good portfolio investment despite all these changes will still remain a disciplined process and structure and not a hopeful punt in the dark.

Over the past five years the growth and influence of both the private equity and hedge fund industry has been remarkable, such that they are now if not dominant in certain company sectors, then at least extremely influential. An illustration of this was perfectly demonstrated in the London market where in 2006 about half of the gain of the FTSE 100 can probably be allocated to the effect of merger and acquisition activity inflating values. This influence is unlikely to wane in the short term especially as hedge fund managers still seem to be able to attract significant sums however, further shakes are inevitable somewhere in the year as certain hedge managers will find themselves on the wrong side of some of their “bets”.

The growth of alternative asset classes seems inevitable as the wave of delisting from equity markets continues. Against this background The London Stock Exchange (LSE) has been remarkably successful and it raised nearly £28 billion in new company listings in 2006, which was an increase of 71% over the previous year and included £10.3 billion from international companies who might have shied away from the US markets and the intrusive obligations of the Sarbanes Oxley legislation and other related obligations. With this success and the growth of AIM, the LSE has a great story to tell. It would seem that AIM reached 5th in the world in terms of the value of new listings at £13.2 billion, and must now be surely regarded as the most successful smaller company market in the world.

However, the figures for delisting from equity markets are still growing and reached (according to Thomson Financial) £77 billion for the combined New York and London markets, and the NYSE saw a withdrawal of $38.8 billion in listed capital and NASDAQ saw $11 billion, which was almost double that of the previous year. The pattern of public to private deals as well as the growth of share buy backs and mergers will only drive this further. So with NASDAQ shrinking and London growing, perhaps the takeover attitude is the wrong way around and the LSE could teach the “Yankee raiders” a thing or two about running a profitable and successful exchange. Time for the LSE to get on the front foot!

***

Copper bottomed – or rather copper probably hasn’t bottomed. From its peak price back in May last year of $8,660 a tonne, the price has now fallen some 32%, and has broken through the apparently important psychological barrier of $6,000. The technical traders have the support level of $5,800 in mind, after which they consider a drop as far as $4,500 may be on the cards. The culprit behind this rout is seemingly being laid at the feet of the weakening demand from the US housing market and if this continues then the price could fall yet further.

But what of the Chinese, who are normally identified as being the key driver of this metal’s market? It would seem that they had already been cannily selling from their State Reserve Bureau and must have earned a significant profit in the process. The hope therefore for the copper “Bugs” is that the Chinese might come back in when the price is low enough and provide a more effective copper bottom but, as inscrutable traders, they will be unlikely to want to push the price much higher. Not comforting news for the commodity investors and not good news for those copper miners who were such important influencers in the FTSE 100 last year.

***

Hold it! Just before you think that maybe UK rates had flattened out, then look at last week’s service sector data. As they indicated the fastest growth since 1997, and that this sector is now predominant in our economy, the chances of another rate rise just went up a notch and a 5.25% figure may now be on the cards for the February Bank of England MPC meeting. Also watch carefully any of the January pay round discussions and agreements as these will be crucial to see if employers, both state and private, can keep a lid on rises and that the real inflationary pressures suffered by ordinary folk aren’t seeping into pay levels – if they do then that will only add further inflationary concerns to the MPC hawks.

***

And finally…..good to see that banks’ security systems are firing on all cylinders as news comes in that a cat in Australia has successfully applied for and received a credit card. Doesn’t that fill you with confidence? Perhaps the dog can now successfully complete those negotiations for that mortgage on the kennel?

Have a good week,

Justin A. Urquhart Stewart
Director
Seven Investment Management