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‘I feel a disturbance in the force’. Yes, it’s approaching faster than the Millennium Falcon. A trailer for the new Star Wars movie ‘The Force Awakens’ has just been shown two months before the film release. An analyst in the USA has estimated that new consumer products tied to the film franchise could bring in revenue of $5bn in the first year. The Star Wars franchise has so far generated over $20bn of licensed merchandise sales while the first six Star war films themselves have generated cinema revenue of over $4.3bn. Increasingly, merchandising is more important to making a commercial success.
Which got us thinking. You can’t beat a good film franchise. Besides toy makers such as Hasbro which, are likely to benefit from higher product sales from the new Star Wars movie, cinemas and nearby restaurant operators will be no doubt rubbing their hands together at the thought of all the extra consumer footfall generated. Earlier this summer, Jurassic World set a new record with over $524m taken globally in ticket sales on the first day of screening. Industry analysts are forecasting that the seventh Star Wars film will surpass this record. In the UK, the cinema industry is already enjoying its best ever year and there is now huge demand for tickets for the first screenings of Star Wars which has already put a strain on cinema chain websites.
Against this, parents will have to endure the torment of securing the must-have Star Wars toys for Christmas. Sounds like light sabres at the ready for the inevitable last minute Christmas ‘click and collect’ scrum!
What have we been watching?
Talking of Star Wars, central bankers continue to avoid the ‘dark side of the force’ with supportive economic policies, although there remains the ‘phantom menace’ of US interest rate policy. Markets have started to factor in the delayed implementation of the first interest rate hike into 2016 so any move by the US Fed in December would likely create a ‘disturbance in the force’. Markets clearly remain addicted to central bank policy stimulus as more dovish comments from the ECB and a Chinese interest rate cut helped buoy equity markets towards the end of the week.
In the UK, retail sales increased strongly in September although were flattered slightly by the inclusion of the August bank holiday weekend and build up to the Rugby World Cup. Public borrowing came in slightly better than expected and shows a continuing closing in the deficit, although the latest numbers would still imply a slight overshoot of the OBR’s borrowing projection of £69.5bn in 2015/16. This could increase the risk that George Osborne will fail to achieve a budget surplus in 2019/20 although a slight overshoot should not make markets concerned about the fundamental sustainability of public finances.
In Europe, the ECB left policy unchanged but paved the way for a possible announcement of bigger asset purchases in December. ECB President Mario Draghi said that inflation will remain very low in the near term while the recovery in domestic demand continues to be hampered by the necessary Balance Sheet adjustments in a number of sectors and the sluggish implementation of structural reforms. The ECB Council apparently discussed a number of potential measures including a move to a more negative deposit rate and an increase in the bond buying programme. In the meantime, Eurozone business activity has picked up more than expected in October, the strongest monthly reading in over four years, suggesting that domestic demand is continuing to lead the European recovery.
In the USA, while the main focus is US interest rate policy there also remains the small issue of the public debt ceiling. Both parties within the US Congress appear at loggerheads over the issue of raising the debt ceiling and the current stop-gap budget measures currently in place expire by November 3rd. Markets are assuming that a last minute agreement will be reached but yet again nerves are jangling with the yield on shorter term US Treasury bills rising. To underline the risk, the US Treasury has postponed a two year government note auction because of the looming debt ceiling.
In China, house prices increased slightly in September, for the fifth straight month in a row. The PBoC cut its one year lending rate by 0.25% to 4.32%. Premier Li Keqiang was also reported to have said on radio that China will make reasonable use of interest rate cuts and reductions to bank’s reserve ratios to aid its slowing economy. However, ahead of meetings this week to set economic targets for the next five years, there were hints of a possible reduction in this year’s official target of ‘about 7%’.
Japan recorded a sixth consecutive monthly trade deficit as exports to China dropped. While the BoJ has been adamant that further economic stimulus is not needed, lower net trade is likely to edge GDP expectations lower which could mean it may not have a choice.
Brent oil hovered around $49. Iran’s energy minister has vowed to reclaim the country’s share of global crude exports within months of sanctions being lifted early next year. Iran’s exports are about 1million barrels a day currently and could rise by 50% pretty quickly compared to its historic pre-sanction production rate of 3.4 million barrels a day. In the meantime, even Saudi Arabia is feeling the pain of lower oil prices. According to news wires, Saudi Arabia is delaying payments to government contractors and asking for price cuts as the country moves into a large budget deficit.
Finally, the overall results and trading update season is generally, so far, not bad and we have been very pleased with the news flow from our companies. However, there appears to be an increasing number of profit warnings in the market. This means we have to remain alert and vigilant when selecting our investments. To use Star Wars analogy it’s a bit like flying the Millennium Falcon through an asteroid field!
This publication is for informational purposes only and should not be relied upon. The opinions expressed here represent analysis by an Alpha Portfolio Management representative at the time of preparation and should not be interpreted as investment advice.
You should seek professional advice before making any investment decisions. The past is not necessarily a guide to future performance. The value of shares and the income from them can fall as well as rise and investors may get back less than they originally invested. The sender does not accept legal responsibility for any errors or omissions, in the context of this message, which arise as a result of internet transmission or as a result of changes made to this document after it was sent.
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