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WEEKLY COMMENTARY 18 JULY 2005 Global Weekly Overview • In the US Producer prices were unchanged in June, while core prices (excluding food and energy) fell by 0.1%, survey evidence points to a further marked decline in producer price inflation. • The US Michigan consumer confidence index improved to 96.5 in July, from 96.0, despite higher gasoline prices. The consensus forecast of 95.0 is an illustration that the markets expected those higher gasoline prices to dampen the consumer's enthusiasm a little. • The latest data brought further signs of a softening of both activity and inflation pressures in the UK labour market. Claimant count unemployment rose by 8,800, in line with expectations of a rise of 8,000, making it the fifth monthly rise in a row. Pan-Europe • Centrica (UK) - released plans regarding both investing in upstream assets and further back office job cuts as part of the business transformation programme. • BBVA (Spain) - saw Unipol engage further in an attempt to stop its drawn out attempt to gain control of BNL (Italy). • Mothercare (UK) – Released trading update which reflected that the UK business continues to be tough and its international business has continued to grow strongly therefore it has helped offset the tougher trading conditions in the UK. US • Whirlpool Corp. the largest US appliance maker has offered $1.35bn in cash and stock for Maytag Corp. topping bids from Haier Group and a consortium led by Ripplewood Holdings LLC and raising possible antitrust concerns. • IBM may say today that second-quarter profit dropped 11% after the sale of its personalcomputer business • Crude Oil prices rose for a second day after Mexico shut offshore fields, where ¾’s of the country’s 3.4 million barrels a day of oil is pumped, as Hurricane Emily approached the country’s Yucatan Peninsula. Far East including Japan • Japan: The market rose, led by export-related stocks on hopes that the weaker yen will boost earnings this year. • China/Hong Kong: In full-year earnings news, shoe manufacturer Kingmaker Footwear posted a 14.7% fall in profits, as the tight labour market, power shortages and higher raw material prices squeezed margins. • Singapore: Malaysian tycoon Quek Leng Chan’s investment vehicle, Guoco, made a general offer for BIL, which owns the Thistle hotel chain. PAGE 1 OF 8 WEEKLY COMMENTARY 18 JULY 2005 Global Weekly Economic data Monday Euro Zone CPI (year-on-year) Tuesday Germany, Producer Prices (year-on-year) ZEW Survey, economic sentiment Euro Zone Industrial Production (Year-on-year) ZEW Survey, Economic Sentiment, Germany US housing starts Wednesday Bank of England Minutes UK, M4 money supply (year-on-year) Italy, Industrial Orders (year-on-year) US, Greenspan Report on Economy & Fed Policy Thursday France, Consumer Spending, Year-on year UK Retail sales, Year-on-year US Initial Jobless Claims US Continuing Claims Friday UK GDP, (Year-on-year) Expected Previous Jun 2.1% 2.0% June July May June June 4.6% 20.0 0.2% 22.0 2050k 4.1% 16.7 0.9% 19.5 2009k June P May 11.7% 1.9% 11.6% 0.1% June May Jul 16th Jul 9th 1.2% 0.8% 327k 2603k 2.5% 1.3% 336k 2617k 1.7% 2.1% Q1, 2nd Economic news • In the US Producer prices were unchanged in June, while core prices (excluding food and energy) fell by 0.1%, survey evidence points to a further marked decline in producer price inflation. The Empire State manufacturing index rebounded to 23.9 in July, from 10.5. This is the highest reading this year. New orders and shipments also rebounded strongly, although the employment index actually fell. Roughly half of the increase in industrial production in June was accounted for by a weather-related 5.3% surge in utilities output. Nonetheless, there was also a healthy 0.4% rise in manufacturing output, led by a jump in motor vehicle production. The downside to this report, however, is that the increase in production pushed capacity utilisation up to 80.0%, from 79.4%. This is the highest reading since December 2000 and not far from the 15-year average of 80.6%. The Empire State survey illustrates that capacity constraints are not causing upward price pressures just yet, but that will not always be the case as spare capacity dwindles further. • The US Michigan consumer confidence index improved to 96.5 in July, from 96.0, despite higher gasoline prices. The consensus forecast of 95.0 is an illustration that the markets expected those higher gasoline prices to dampen the consumer's enthusiasm a little. The expectations index improved again, but the current conditions index deteriorated a little. • The latest data brought further signs of a softening of both activity and inflation pressures in the UK labour market. Claimant count unemployment rose by 8,800, in line with expectations of a rise of 8,000, making it the fifth monthly rise in a row. This was the first time in recent months that higher unemployment was driven by falling employment rather than an expanding workforce. Indeed, employment fell by 72,000 in the three months to May against the previous three, the biggest drop since 1993. Meanwhile, average earnings growth softened too. The headline growth rate including bonuses dropped from 4.6% in April to 4.1% in May, as February’s bonus-related jump dropped out of PAGE 2 OF 8 WEEKLY COMMENTARY 18 JULY 2005 Global Weekly the three month comparison. But annual growth fell too. And excluding bonuses, both the headline and annual growth rates dropped from 4.1% to 4.0%. Pan-Europe Good week for all the main European markets with the exception of the UK which was modestly down on the week. The UK markets were down main due to falls in the prices of the large oil stocks. Additionally the mining stocks performed poorly due to continuing weakness in the London Metal Exchange's base metal index. • In an otherwise quiet week in the sector truck and industrial engine maker Volvo (Swe.) released news of a significant contract win for its aerospace division. The business has secured orders to supply Pratt & Whitney (US) with components for the F-35 Joint Strike Fighter. • Centrica (UK) - released plans regarding both investing in upstream assets and further back office job cuts as part of the business transformation programme. • BBVA (Spain) - saw Unipol engage further in an attempt to stop its drawn out attempt to gain control of BNL (Italy). • Provident Financial (UK) - released a trading update indicating that across most divisions business was in line with expectations, with the exception of Yes Car Credit which continues to disappoint. • Unite (UK) - produced a trading update indicating positive underlying demand trends for student accommodation and financial results in line with expectations. • Pilkington (UK)- entered into an agreement to acquire the US assets of Autostock Distribution, a glass distributor with 21 locations in the US, which is a further step to its stage 3 of its Cash for Growth strategy. • Mothercare (UK) – Released trading update which reflected that the UK business continues to be tough and its international business has continued to grow strongly therefore it has helped offset the tougher trading conditions in the UK. • Kesa (UK) – has signed a new committed €800m five year revolving credit facility which will reduce its cost of borrowing and enhance the maturity profile of the group’s debt. • Pernod (France) –to sell Seagram’s vodka business in the US to focus on Stolichnaya vodka, which it will acquire with the purchase of Allied Domecq. • Diageo (UK) – The refinancing of Burger King debt brings to an end the guarantee ($850m senior and revolving credit facility) that Diageo has provided for BKC since the disposal of the business in 2002. Repayments of $266m will be made which will reduce Diageo’s net debt. • Associated British Foods (UK) – Agreed to buy Littlewoods stores for £409m to expand its discount clothing business, Primark. ABF will keep around 25-40 stores and intends to sell the rest to other retailers. • Premier Foods (UK) – trading outlook for the year remains in line with the company’s expectations and are looking forward to an improved second half when a number of its new products will be launched into the market place. • McBride (UK) – Previous Group Finance director, Miles Roberts, has taken up the role of CEO, after Mike Handley stepped down and the recruitment of a new FD is currently underway. PAGE 3 OF 8 WEEKLY COMMENTARY 18 JULY 2005 Global Weekly • British American Tobacco (UK)– plans to close plants in the UK and Ireland costing in the region of 600 jobs in a bid to reduce costs. Higher costs in Western Europe and the increasing trend towards local production has had a negative impact in the UK and Ireland’s manufacturing operations. The company will begin negotiations within the next 24 months to resolve the matter. • BP's (UK) Thunderhorse deepwater operating platform was damaged by hurricane dennis, leaving it listing at an angle of 20-30 degrees. It is unclear at this stage how extensive the damage is, but production from what is one of BP's most significant wells, will almost certainly be delayed. • Shell (UK) announced that costs at its Sakhalin field may double to $20bn as metal prices, contractor fees and the weak US$ all contribute to rising costs. • Novartis (Switzerland) reported pretty decent second quarter numbers, with good sales numbers across the divisions, though once again aided by the weak US$. • Deutsche Lufthansa (Germany) released steadily improving passenger numbers, with long haul flights to Asia, Africa and the Middle-east underlying the improved capacity utilisation. US The Trade Balance was reported at -$55.3bn, below both the previous level and the forecast of -$57bn respectively. Advance Retail Sales came in higher at 1.7%, well ahead of the prior level of -0.5% and the surveyed level of 1.0%. Initial jobless Claims were reported at 336K which was above both the prior level and the survey of 319K and 322K respectively. Industrial production was 0.9%, above the 0.4% prior level and 0.4% forecast. During the week, performance was led by info tech, consumer discretionary and consumer staples stocks whilst energy, utilities and health care were the worst performing sectors. 58 of the S&P 500 have now reported their second quarter 2005 earnings. Earnings are running about 0.2% below consensus estimates. 65.5% of companies have reported positive surprises, 19.0% have been in-line and 15.5% have disappointed. • Whirlpool Corp. the largest US appliance maker has offered $1.35bn in cash and stock for Maytag Corp. topping bids from Haier Group and a consortium led by Ripplewood Holdings LLC and raising possible antitrust concerns. Whirlpool would assume $969 million in debt, said yesterday it would decide by Aug. 9th whether to make a formal offer for Maytag. • IBM may say today that second-quarter profit dropped 11% after the sale of its personal-computer business. Profit likely fell to $1.78bn, or $1.03 a share excluding costs for firing workers and a gain from selling its PC unit, from $1.99bn or $1.16 a share. • Crude Oil prices rose for a second day after Mexico shut offshore fields, where ¾’s of the country’s 3.4 million barrels a day of oil is pumped, as Hurricane Emily approached the country’s Yucatan Peninsula. • The US economy is growing at a ‘solid’ pace, causing inflation pressures to mount, according to a quarterly survey by the National Association for Business Economics of its members. 60% of the surveyed economists said GDP will expand by more than 3% in this year’s second half. At the same time, an index of prices charged by member companies rose to a nine-year high. ABLE PAGE 4 OF 8 WEEKLY COMMENTARY 18 JULY 2005 Global Weekly Australia The recovery in the domestic housing market, which started in mid-2004, appears to have stalled, as reflected in the latest data on new home loans, which slid 3.7% year-on-year in May. The bulk of the decline came from investment properties, which fell 6.8% year-on-year, while loans for owner-occupied homes slipped 1.5% year-on-year. Consumer sentiment, meanwhile, took another battering in July, on worries over the soft housing market and the recent terror attack on London. The National Australia Bank survey showed business activity staying resilient in June, after May’s surprise upturn. Business conditions were underpinned by improved trading conditions, while profits were steady. However, labour market indicators continue to point towards a moderation in the second half of the year. • The stock market rose 1.5% last week, led by the financials sector, as investors bought defensive stocks ahead of the results season. The energy sector lagged the market as oil prices retreated. Corporate news was thin, as companies focused on the results season, which starts at the end of the month. • Foster's started to streamline the headcount at its wine division, as it assimilated the Southcorp Group following its recent take-over of the company, which was finalised in June. • Woolworths is considering the sale and lease back of its A$1bn chain of 11 national distribution centres in an aim to cut debt. This follows the recent acquisitions of Foodland and Australian Leisure & Hospitality. Fixed Interest Bonds continued to spiral lower last week on the back of easing crude prices, a rally in US stocks, and bullish comments by a Fed official. PAGE 5 OF 8 WEEKLY COMMENTARY 18 JULY 2005 Global Weekly Emerging markets Strong consumer spending, tame inflation data for June and a number of strong earnings reports helped US markets rise for a third straight week. Emerging markets also made solid gains, with South Africa and South Korea taking top honours. In Brazil, retail sales grew by a weaker than expected 2.7% year-on-year in May, with sectors sensitive to the domestic labour market remaining sluggish. Chile raised interest rates by a further 0.25%, citing inflation concerns and stronger economic growth. The latest hike also helped to support the peso last week. China reported a 30.6% year-on-year surge in exports for June, while imports rose by 15.6%. This helped boost the trade surplus to US$9.7bn. Meanwhile, foreign direct investment growth slowed in the first half by 3.2% year-on-year to US$28.6bn, suggesting that capital inflows may be leveling off. Columbia’s defence minister Jorge Uribe resigned a year before the official end to his term, citing personal reasons. The Malaysian government maintained its full-year GDP growth target of 5-6% for 2005, despite high oil prices. Taiwan’s main opposition Kuomintang Party elected a new leader, Taipei mayor Ma Ying-jeou, who is reputed to be reform-minded as well as popular. Thai investors welcomed the government’s measures to pump prime the economy, including a pay raise for civil servants and a hike in the minimum wage. • Brazil: Low-cost airline Gol, which we hold, added another leg to its distribution channel by signing on to Amadeus, a global travel reservation system. • Chile: LAN Airlines reported strong passenger traffic in June. The low-cost airline also continues to expand its fleet, with its board approving the purchase of 25 short-range Airbus aircraft. • India: MphasiS BFL, posted strong sales growth but suffered a fall in profit margins. Meanwhile, Tata Power said it may set up of a hydroelectric power plant in central India. • Israel: Pharmaceutical company Teva lost an appeals court decision that had upheld the validity of Eli Lilly’s patent on antidepressant drug Sarafem. • Korea: Steel-maker Posco plans to buyback US$642m worth of shares, which it will offer as depository receipts on the Tokyo Stock Exchange in December. Meanwhile, LG Electronics and Philips plan to each sell about US$400m worth of LG Philips LCD shares in a US$1.2bn ADR issue. In earnings news, Samsung Electronics remained optimistic in its 2005 earnings outlook, despite a 46% year-on-year fall in second quarter profits. • Malaysia: Bursa Malaysia got the nod to liberalise the Central Depository System account structure, which should make it cheaper and easier to trade. The authorities also approved a hike in the maximum clearing fee payable per contract, more than doubling it from 200 ringgit to 500 ringgit per contract. • Oman: Oman Oil posted a 34.7% year-on-year increase in first quarter results, while revenues grew by 15.9%. In other news, Port Services Corporation said it was exploring the feasibility of setting up a small-medium scale ship repair facility in Muscat. • Russia: Oil producer Lukoil filed a US$256m counterclaim against PetroKazakhstan, accusing it of obstructing the decision making process at their joint venture, Turgai Petroleum. • South Africa: There was good news in the retail sector, as they continue to benefit from the favourable low interest rate environment. Truworths announced an 14% year-on-year rise in comparable store sales, while Edgars reported an 25% increase in sales in its first quarter. At the PAGE 6 OF 8 WEEKLY COMMENTARY 18 JULY 2005 Global Weekly AGM, shareholders agreed to the proposed 10-for-1 share split and voted in favour of placing 10.6% of the company’s equity in the hands of black employees. • Thailand: PTT Exploration & Production’s shares rose after Moody’s upgraded its credit ratings and on prospects of further gas field acquisitions. Far East and Japan Strong consumer spending, tame inflation data for June and a number of strong earnings reports helped US markets rise for a third straight week. Asian markets rose in tandem with US markets. China’s foreign direct investment shrank 3.2% year-on-year in the first half of 2005 to US$28.6bn, suggesting that capital inflows may be levelling off. Meanwhile, inflation for 2005 was revised down from 3.9% to 2.2%, relieving some pressure for the removal of the currency peg. The Bank of Japan has become more optimistic about the domestic economy, with the central bank governor saying that it may be emerging from the doldrums, although weaker-than-expected May industrial production data highlighted the still uneven recovery. Singapore’s GDP grew 3.9% in the second quarter and surpassed the market consensus of 2.5%, according to flash estimates. The Malaysian government maintained its full-year GDP growth target of 5-6% for 2005, despite high oil prices. Taiwan’s main opposition Kuomintang Party elected a new leader, Taipei mayor Ma Ying-jeou, who is reputed to be reform-minded as well as popular. Thai investors welcomed the government’s measures to pump prime the economy, including a pay raise for civil servants and a hike in the minimum wage. • Japan: The market rose, led by export-related stocks on hopes that the weaker yen will boost earnings this year. On the corporate front, Mitsubishi Heavy Industries, showed interest in buying British Nuclear Fuels’ stake in US nuclear plant maker Westinghouse Electric for US$2bn. • China/Hong Kong: In full-year earnings news, shoe manufacturer Kingmaker Footwear posted a 14.7% fall in profits, as the tight labour market, power shortages and higher raw material prices squeezed margins. Meanwhile, fast food restaurateur Café de Coral reported a 10.4% rise in profits despite steady losses at its North American joint venture, while rival Fairwood recorded a nine-fold surge in profits on the back of a recovery in operations and a property sale. Elsewhere, airport operator Beijing Capital International Airport (BCIA) announced a 24% year-on-year rise in June passenger volumes. Separately, CNOOC said it may raise its bid for Unocal by US$500m to US$19bn. • Indonesia: Car distributor Astra won its bid for a 54% stake in toll road operator Marga Mandala Sakti. Separately, Astra’s car sales dipped in June but first half sales were still 28% higher year-onyear. Meanwhile, Telkom met its US SEC filing deadline for its 2004 accounts, after earlier worries of a delay. Elsewhere, major shareholder Sari Dasa Karsa will sell a partial stake in Bank Buana at 2.6times book value to Singapore’s United Overseas Bank (UOB), giving it a 53% stake. • Korea: Steel-maker Posco plans to buyback US$642m worth of shares, which it will offer as depository receipts on the Tokyo Stock Exchange in December. Separately, Binggrae also plans to buyback 1% of its outstanding shares, which it will cancel. Meanwhile, LG Electronics and Philips plan to each sell about US$400m worth of LG Philips LCD shares in a US$1.2bn ADR issue. In earnings news, Samsung Electronics remained optimistic in its 2005 earnings outlook, despite a 46% year-on-year fall in second quarter profits. • Malaysia: Bursa Malaysia got the nod to liberalise the Central Depository System account structure, which should make it cheaper and easier to trade. The authorities also approved a hike in the PAGE 7 OF 8 WEEKLY COMMENTARY 18 JULY 2005 Global Weekly maximum clearing fee payable per contract, more than doubling it from 200 ringgit to 500 ringgit per contract. • Philippines: Ratings agencies Standard & Poor’s and Fitch last week cut their outlooks for the nation’s credit ratings, citing the ongoing leadership crisis, which may derail the much needed budgetary overhaul. • Singapore: Malaysian tycoon Quek Leng Chan’s investment vehicle, Guoco, made a general offer for BIL, which owns the Thistle hotel chain. In earnings news, defence contractor ST Engineering posted a 17% year-on-year rise in second quarter profits, with strong contributions from its aerospace, electronics, and marine arms. Local media group Singapore Press Holdings (SPH) posted a 73% yearon-year fall in third quarter profits. In the previous period, profits were boosted by the sale of its Belgacom stake and the Times House site. Asian Fixed Income Asian dollar-bond yield-spreads tightened last week after Standard & Poor’s upgraded the ratings outlook of 17 Asian financial institutions, while, separately, Moody’s upgraded more than 20 government-related Asian issuers, following an assessment under its new “joint-default analysis” methodology. For more information Alex Boggis Mable Chan Betty Yau Aberdeen International Fund Managers Limited Room 3102-3, 31/F., Alexandra House 16-20 Chater Road Central Hong Kong Tel: +852 2103 4700 Fax: +852 2827 8908 www.aberdeen-asset.com.hk Important information The above is strictly information purposes only and should not be considered an offer, or solicitation, to deal in any of the mentioned funds. Any research or analysis used to derive, or in relation to, the above information has been procured by Aberdeen International Fund Managers Limited (“AIFML”) for its own use, without taking into account the investment objectives, financial situation or particular needs of any specific investor, and may have been acted on for AIFML’s own purpose. AIFML does not warrant the accuracy, adequacy or completeness of the information herein and expressly disclaims liability for any errors or omissions. The information is given on a general basis without obligation and on the understanding that any person acting upon or in reliance on it, does so entirely at his or her own risk. Any projections or other forward-looking statements regarding future events or performance of countries, markets or companies are not necessarily indicative of, and may differ from, actual events or results. AIFML reserves the right to make changes and corrections to the information, including any opinions or forecasts expressed herein at any time, without notice. PAGE 8 OF 8