One fifth of high street stores forecast to close within five years

By Patrick Corby

The Centre for Retail Research (CRR) has forecast that the number of retail stores in the UK could fall by 62,000 by 2015.

Currently online consumption of retail goods is approximately 12.7% and is likely to surge towards 22% over the next five years.

Caption: UK high street retail set to be squeezed out by the internet and rising inflation. Image: Reuters

The sharp reduction in stores comes from the effect of businesses shifting online, a process which is being hurried along by the recessionary environment in which rising costs are reducing profit margins for small and medium sized companies.

In November 2012 the Bank of England (BoE) released their quarterly Inflation Report announcing that three in ten stores within the UK were making a loss. The BoE stated that low interest rates were keeping unhealthy companies within the margin of sustaining their operations until recessionary adjustments were made.

Sir Mervyn King, BoE governor, has stated that “obviously, this cannot continue indefinitely”, and added how “policy can only smooth, not prevent, the ultimate adjustment”.

Right now prices are being inflated at around 21% to increase output short term but profits are only rising at 12% and with this pressure the technological shift of the internet is occurring rapidly.

The report estimates that closures will be concentrated across pharmacy, health and beauty stores as well as music, books, gifts and DIY stores. This announcement has been pre-empted by such closures as HMV and Jessops early this year. As many as 316,000 jobs could be lost due to the process.

Professor Joshua Bamfield, the author of the report, said: “Retail stores will remain an important, although smaller, part of the shopping process as online retail continues to grow.”

The shift will mostly affect Wales and the North West of England, which are seen as the weakest margin stores and therefore would take the brunt with as many as 29% of stores closing in Wales.

According to the Financial Services Authority (FSA), hedge funds are already positioning themselves for the risks UK closures expose their investments to by shorting the shares they believe are most exposed. Shorting involves borrowing shares and then waiting for them to fall to buy them back cheap and locking the profit.

Their biggest concerns right now are WH Smith, which has 63% of its shares being shorted, the Home Retail Group – which owns Argos and Homebase – which has more than 20% of shares being shorted, and Halfords which has an enormous 90% of its shares bet on a sharp fall in value.

Lloyds Banking Group share price reaches the breakeven rate

By Patrick Corby

The share price in the state-backed Lloyds Banking Group reached the breakeven price on Friday, solidifying the view that the bank may again be privatised to partially return the  public funds spent in bailing the bank out.

Lloyds Banking Group share price reaches the breakeven rate

The banking group has had a 39% public stake since it was bought up by the UK government in the shadow of the financial crisis in 2008. A sum of £20.5bn in public money was spent in an attempt to sure up the company and stop it from becoming insolvent on its deposit liabilities.

Lloyds Bank was the top performer of the Financial Times Stock Exchange (FTSE) 100 last year. On Friday its share price rose 2.5%, passing the 61.2p per share targeted breakeven rate set by George Osborne, the UK chancellor.

City analysts had previously believed that the breakeven rate on the stake would be set at 72.3p, the average price paid for the shares by the government in 2008. Instead this in-the-money price has been targeted downwards to 61.2p. This price is based on the price the shares were trading at on the day the UK government bought the stake in the company rather than the 72.3p actually paid.

Banks analyst at Investec, Ian Gordon said: “Having missed the chance to sell some of its stake in September 2010 when the shares peaked at 77p – and subsequently collapsed to 21p by November 2011, it would be prudent to commence a disposal without delay.”

Mike van Dulken, head of research at Accendo Markets, said: “It’s a big trade-off between returning the shares to the markets as quickly as possible (well before the 2015 election anyway), and taking the opportunity to make up for some of the costs taxpayers incurred via forced bailouts.”

Presently the UK is also sitting on a £9.2 billion loss from its Royal Bank of Scotland (RBS) stake. Public money was used again in 2008 to inject a sum of £45bn at 502p a share but the equivalent target price for RBS is 407p, which would again present a loss to the public. RBS shares are currently trading around the 336p mark.

The chancellor has yet to announce any plans or strategies to sell off the 39% stake in Lloyd’s Banking Group or the 81% stake in the Royal Bank of Scotland.

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Student loans: holders of student debt are set to take a hit

By Patrick Corby

It may be time to start worrying about US student loans.  New data from the Federal Reserve (FED) states student loans have tripled from 2004 to $966 billion and are becoming a growing financial problem in the US.

Student loans now make up by far the largest category of US household debt and, since 2010, have taken over both credit card and automobile debt as a percentage of income while still growing at a rapid rate.

The FED report offers four rationales for this increase: lower interest rates have increased the amount of students opting into education, increasing numbers of parents taking out loans for their children, students staying in education longer, and the discharging of student debt being difficult in a recessionary economy.

A study by the Institute for College and Success states: “The average number of borrowers and the average sum they borrow has also increased by 70% since 2004. The reasons are obvious: falling real incomes for graduates or significant graduate unemployment while university course costs continually rise fuelling masses of debt to be taken on by students and therefore shouldered by private institutions and by the US government in loans.”

The Institute further stated: “A stunning 37.8% of recent graduates are working in jobs that do not require a college degree.” The study said that means wages are depressed, making the situation for graduates even more difficult. Student loans are increasing in an economy that cannot support students or their debt.

The effect of this is the ever-increasing delinquency rate on these loans by students. The FED report states that 30% are 90 days behind their payments, up from 10% in 2004.

According to the Fair Isaac Corporation (FICO), one of the leading analytics research institutes: “Research by FICO Labs into the growing student lending crisis in the US has found that, as a group, individuals taking out student loans today pose a significantly greater risk of default than those who took out student loans just a few years ago. The situation is compounded by significant growth in the amount of debt that new graduates are carrying.

“The delinquency rate today on student loans that were originated from 2005-2007 is 12.4%. The comparable figure for student loans that were originated from 2010-2012 is 15.1%, representing an increase in the delinquency rate by nearly 22%.”

The Department for Education has also released a report that highlights this. Now student loan default rates in private institutions stand at 22.7%, those in public institutions at 11% and in non-profit organisation at 7.5%. One-in-five student loans in the private education sector in the USA are now in default.

This is roughly the same default rate expected for those subprime mortgage loans made in 2005-2006 that crunched in 2009 (although the scale is much smaller). In 2007 mortgage debt hovered around $10.1 trillion, while student debt is hovering at around $1 trillion. Yet in both cases there was a key shift to over a 20% delinquency rate which caused faith in the loans to shift.

Another parallel is that the same states that were more highly exposed to the mortgage crisis are exposed here as well. California, Florida, New York and Illinois all stand with an average of over $25,000 per student. So far, Florida, Texas and Nevada all have increasing delinquency rates.

This has been noticed by those institutions that hold this now risky debt. Back in February the largest US student lender, SLM Corp or Sallie Mae, sold $1.1 billion of student loan securities through the securitisation process. This is the first time that Sallie Mae, a government sponsored enterprise, has decided to offload the riskiest loans to private investors who are seeking higher yields.

Dealers in student loan securitisation sold a total of $5.6 billion in student loans from January to February of 2013, triple that of late 2012. Second Market Holding has even released a way to ‘short’, or bet, on the fall of student loans.

“This situation is simply unsustainable and we’re already suffering the consequences,” said Dr Andrew Jennings of FICO’s chief analytics lab, “when wage growth is slow and jobs are not as plentiful as they once were, it is impossible for individuals to continue taking out ever-larger student loans without greatly increasing the risk of default. There is no way around that harsh reality.”

When rates become unsustainable institutions’ income falls, the finance will stop, and the student loan distortion of increasing student loans in a recession will adjust itself accordingly. That is, shrink.

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EU economies to breach deficit limits

By Patrick Corby

Austerity measures throughout the European economy are to be loosened as France, Spain and the Netherlands, three of the five largest European economies, will fail to meet deficit limits mandated to curb wild government spending.

European contraction increases as debt limits are not adhered to, Alamy

The mandate since the sovereign crisis emerged from the 2007 financial crisis has seen annual deficit limits of 3%. New data released by the European Central Bank (ECB) shows all three will grossly miss this target with Italy, Europe’s third largest economy, increasing its deficit by 2.9%

The currency bloc taking into consideration these new factors will contract 0.4% this year instead of the projected 0.3%.

Despite three years of austerity mandates in the currency bloc, the new data shows a continuing runaway increase in debt levels in Europe. Next year the total debt-to-GDP for the whole market area of Europe will verge stand at 96% of GDP meaning the whole bloc is now running itself by borrowing almost 100% of its output.

With 120% of GDP standing as the level where confidence is lost on the repayment of loans, the countries that are set to run through that limit stand as: Italy (132%), Portugal (124%), Cyprus (124%), Ireland (120%) and Greece (175%).

Unemployment in Europe stands at a total of 11% of the 739m-strong, population or 81.29m individuals, and is projected to keep falling. Spain tops the group with an unemployment rate of 26.5%, Cyprus stands at 15% and is set to now rise as the economy contracts 8.7% this year after the nationalisation of banks in early March.

Olli Rehn, European vice-president for economic and monetary affairs, stated:  “In view of the protracted recession, we must do whatever it takes to overcome the unemployment crisis in Europe. The EU’s policy mix is focused on sustainable growth and job creation. Fiscal consolidation is continuing, but its pace is slowing down. In parallel, structural reforms must be intensified to unlock growth in Europe.”

France and Spain have been given an extra two years grace period in order to adjust their deficit limits, whilst the Netherlands have been given an extra year.

The French stated it needed an extension of one year in order to cut its deficit, which will increase its debt by 4.2% this year. EU officials, upon an analysis of the matter, extended the limit to two years, allowing France extra time instead of forcing massive cuts into the country.

“In order to bring the deficit below 3 per cent next year, as envisaged by the French authorities, a significantly larger and front-loaded effort of fiscal consolidation would be required compared to what is currently planned,” Rehn said.

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Rwanda issues its first international ten year bond

By Patrick Corby

The Sub-Saharan state of Rwanda, under the presidency of Paul Kagame, plans to raise $400m in the début sale of a ten year government bond.

Investors have shown a great deal of interest in the $400m decade- long bonds, auctioning a total of $3bn to buy up the bonds. The sheer size of the orders allowed the interest on the loans to be reduced from the initial 7.5% per annum to 6.875% per annum.

Rwanda issues first international bond under the presidency of Paul Kagame, Photo: AFP

The central African state, infamous for five years of civil war culminating in a 1994 genocide is now recognised as one of the fastest growing economies in the world whilst ranking the least corrupt, according to Transparency International.

Growth in the state has hovered at 8% per annum since 2003 with inflation well under control, giving it a perfect foundation to start borrowing off investors comfortably.

The Rwandan state will use the $400m to repay previous loans of $200m, finance infrastructure such as a hydropower project and airline RwanAir with $50m and spend $150m on the completion of the convention centre in its central city Kigali.

The state is also planning to sell stakes in some of its state owned companies in agriculture, services, transport and banking in a push towards privatisation.

Investors have increasingly been attracted towards emerging and frontier markets in an attempt to pull their money out of Europe which is seen as increasingly over indebted, risky and low yielding. This has started an arching trend as more and more investors pledge their savings into emerging markets in an attempt to steer clear of western countries involved in sovereign debt crises.

As in the Rwandan deal the amount of investors attracted towards Africa and Asia to place their money has been slowly auctioning down the interest yield demanded, making it cheaper for countries in these continents to attract loans to finance themselves.

Several Sub-Saharan states now enjoy cheaper rates than Italy or Spain which is likely to continue as the crisis deepens in the West and Africa enjoys steady growth.

Florian von Hartig, of South Africa’s Standard Bank, said: “There’s not enough African bonds to satisfy demand”. Nick Darrant, from BNP Paribas, which along with Citigroup is managing the Rwanda bond sale, concurred, adding: “The supply and demand is immense.”

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EU lifts sanctions on Myanmar

By Patrick Corby

The European Union has decided to permanently lift all trade sanctions in Myanmar (Burma) starting 30^th April in response to the “remarkable process of reform”.

Myanmar sanctions lifted amid political reforms. Photo: Getty

The permanent dissolving of political sanctions, which were temporarily suspended last year, will signal and encourage European investment in Myanmar and leave the US as the only nation to maintain their political pressure on Myanmnar.

This month, Myanmar opened up 30 offshore oil and gas exploration block contracts for auction in a bid to attract fierce competition from the extraction sector. In January, the nation had also opened 18 onshore oil and gas block contracts for auction.

Those who have already expressed interest in entering Myanmar include Chevron, BP, Woodside, Royal Dutch Shell, ConocoPhillips, Exxon Mobil and Statoil, showing the great attraction of further exploration in Burma.

The extraction projects in Myanmar stretch on and offshore in copper, nickel, coal, jade mines, oil and gas. Other sectors that will draw interest, according to Normita, are the telecommunications and financial sector.

Over the last 30 years $20 billion has been invested in Myanmar, mostly from China and Thailand. In January, the Chinese company PetroChina, confirmed that a gas pipe will be operational this year in an attempt to free itself from over dependence on the strait of Malacca, controlled by a US military presence.

Myanmar’s opening offers a great advantage to those companies wishing to gear into Asia, as it creates the left basin of the natural harbour and the oil rich Bay of Bengal, offering an opening into the shipping route to the Indian Ocean and points of entry into Africa and the Middle East.

“We are working on a second wave of reforms, which will focus especially on the development of the country and the public’s welfare,” the current president of Myanmar, Thein Sein, stated in his address on 23^rd April.

“Myanmar is one of the world’s last untapped frontiers, and this is a period of change, of uncertainty and also of promise,” said Bob Jeffrey, chairman of the advertising group J. Walter Thompson.

Thein Sein, in what can be interpreted as a reflection on the current violence in Myanmar southern, stated in relation to the long standing conflicts of Buddist and Muslim groups: “Only when we have real economic progress will the democratic process flourish, and the suspension of EU and US sanctions would help greatly.”

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