Friday, 2nd July 2010

Hann-Ju Ho
Industry Sector Weekly Senior Sector Economist | Economic Research
Telephone: +44 (0)207 158 1745 (7441 1745)
Carl Paraskevas
Recap and the week ahead Sector Economist | Economic Research
Telephone: +44 (0)207 158 2473 (7441 2473)

Chart a: European stocks fell for a second week Weak data and higher equity risk premiums
Equities fell sharply in the past week, as weak economic
5 Day % -10 -8 -6 -4 -2 0
data – including the Chinese and US manufacturing PMI
Health care surveys – increased downside risks for global growth.
Food & bev.
Spain’s AAA rating was also placed on review for a
Oil & gas
Technology
possible downgrade by Moody’s. On the plus side, the
Telecoms ECB revealed that it lent eurozone banks €131.9bn in its 3-
Stoxx 600 month tender, somewhat less than markets had anticipated.
Banks
Financial serv. As we will argue on the next page, uncertainty regarding
Construction & mat. the economic outlook has pushed equity risk premiums
Travel & leisure
higher than during the height of the financial crisis.
Basic resources
Equities in the coming months, therefore, could be driven
Source: Lloyds TSB Corporate Markets Economic Research, Bloomberg. As at 9 am (Fri ) London
more by changes to risk premia than by earnings surprises.

Defensives outperform; basic resources weakest

Not surprisingly, defensive sectors tended to outperform
Chart b: A weak Chinese manufacturing PMI survey led basic over the past week, with the some of the smallest declines
resources lower in health care (-2.6%), food & beverages (-2.9%) and
telecoms (-3.7%). The technology and oil & gas sectors
Index Index
800 China PMI (RHS) 58 also posted smaller declines of 3.6% and 3.4%, respectively.
56
700 54 At the other end of the scale, basic resources fell the most
600 52
50 by 8.3%, weighed by concerns about the outlook for
500 48 Chinese growth. Travel & leisure and retail fell by 5.7% and
46 4.5%, respectively, following weak US and UK consumer
400 44
confidence surveys.
300 Basic resources 42
40
200 38 Macroeconomic backdrop for consumer-related
Apr-08

Apr-09
Jan-08

Jan-09

Apr-10
Oct-08

Oct-09
Jan-10
Apr-07
Jan-07

Oct-07

Jul-08

Jul-09

sector to remain tough

Jul-07

The macroeconomic environment for consumer-related

Source: Lloyds TSB Corporate Markets Economic Research, Markit, Datastream
sectors is likely to remain tough and consumer spending
growth in the UK is likely to stay weak in the next year or
two, weighed in part by a depressed labour market.
Moreover, a rise in VAT to 20% next January will further
Chart c: Profit margins in the beer industry have improved, despite reduce consumers’ real spending power. Hence, the
the tough outlook for consumer spending impetus for individual companies is to cut costs and debt
levels, and to increase market share.
40 Profit margin %
30 Nevertheless, Greene King said full-year pretax profits
20 rose 3.8% to £123m and also that performance was
Median
ahead of expectations in the first two months of the FY.
10
Profit margins for Greene King and its peers fell in both
0 2008 and 2009, but have recovered this year and are
-10 expected to be maintained in 2011, see chart c.
-20 Debenhams was cautious on retail prospects, but said
2005 2006 2007 2008 2009 2010 2011 gross profit margins for the year would exceed the
Peer group: M&B, Greene King, Wetherspoon, Marston's, Enterprise Inn, previous forecast, despite a LFL fall in sales of 0.4% in the
Punch Taverns, Fuller Smith & Turner
42 weeks to 19 June.
Source: Lloyds TSB Corporate Markets Economic Research, Bloomberg

Economic research can be accessed at: http://www.lloydstsbcorporatemarkets.com, Bloomberg: LLOY<GO>

Corporate profit outlook
Chart d: Profit to GDP ratios High expectations for Q2
Since the heightening of the eurozone sovereign debt
30% Eurozone profit to GDP (RHS) 50% crisis in May of this year, risk aversion to equities has risen
UK profit to GDP UK Long term average 48% significantly. With the second quarter earnings season just
25% 46% over the horizon, market participants will be hoping that
44%
20% another strong profit performance by the corporate sector
Eurozone Long term average 42%
40%
will help to increase market confidence. However, reliance
15%
38% on Q1 growth performance continuing over the short to
10% 36% medium term may be misplaced. The Euro Stoxx 600
5%
US Long term average 34% bottom-up consensus growth estimates for both the
US profit to GDP 32% second quarter and full year 2010 are for earnings per
0% 30% share to increase by 39.8% in Q2 and 31.7% for the full
1991 1995 1999 2003 2007 2011F year. In later years, growth prospects are anticipated to
moderate to 19% in 2011 and 12% in 2012.
Source: Lloyds TSB Corporate Markets Economic Research, Bloomberg

Long-run economic outperformance unlikely

While recent key indicators in Europe, such as the PMI
surveys imply that Q2 will be in the bag for many
Chart e: UK Foreign Direct Investment Positions 2008 companies, recent declines in those same surveys
suggest activity levels may have peaked, potentially
100% moderating future growth potential in earnings. In the
80% medium term there may be even fewer reasons to be
60%
optimistic about excessive growth prospects of profits over
and above economic growth, especially in the eurozone.
40%
We expect profits as a share of GDP in the common
20% currency area to decline due to a number of factors,
0% including lack of labour flexibility. However, both in the US
2000 2001 2002 2003 2004 2005 2006 2007 2008 and UK, profits will have to moderate closer to GDP
Europe Africa growth as these economies move closer to capacity.
Americas Asia
Oceana and Polar Regions Greater exposure to Asia and South America
Of course, economic measures of profit vary from
Source: Lloyds Corporate Markets Economic Research
accounting measures, particularly in failing to capture
property disposals and other changes in asset values, but
also in not taking into account foreign direct investment,
which is significant for many European corporates. In the
Chart f: UK Foreign Direct Investment Position 2007 case of the UK, we have seen increased foreign direct
investment levels move away from Europe and more
Agriculture Mining and towards the Americas, especially South America, and also
and Fishing Quarrying in Asia. Therefore profits attributable to UK corporates will
0% 15% show greater dependence on growth in these regions.
Services Manufacturing From a sector perspective, UK investment abroad is
51% 30% largely concentrated in services, manufacturing and
mining. In the services segment, financial services and
transport, storage & communications make up the largest
areas of foreign direct investment.
Cosntruction Electricity, Gas and Water Negative sentiment weights on valuation
1% 3% With equity risk premiums higher then during the height of
the financial crisis and the earnings outlook still relatively
Source: Lloyds TSB Corporate Markets Economic Research
strong, market valuations are likely to be driven less by
earnings surprises. Instead, relative risk aversion and
uncertainty surrounding central macroeconomic forecasts
will drive market value reaction in the short term.
Increasingly, European market participants have become
more sensitive to developments in Asia and the Americas,
where significant demand emanates in the form of
exports and foreign direct investment.

2
 5-9 July
Sector Time Company Release EPS Estimate

Mon

Travel & Leisure 07:00 British Airways PLC June 2010 Sales and Revenue Release - Traffic Statistics

Financial Services Industrivarden AB Q2 2010 Earnings Release

Travel & Leisure Ryanair Holdings PLC June 2010 Sales and Revenue Release - Traffic Stats
Tue
Oil & Gas Producers Tullow Oil PLC Q2 2010 Sales and Revenue Release - Trading Statement
Home Construction Persimmon PLC Q2 2010 Sales and Revenue Release - Trading Update
Construction & Materials Balfour Beatty PLC Q2 2010 Sales and Revenue Release - Interim Management Statement
Wed
Financial Services 07:00 3i Group PLC Q1 2011 Sales and Revenue Release - Interim Management Statement
Travel & Leisure 07:00 Air France-KLM June 2010 Sales and Revenue Release - Traffic Report
Travel & Leisure 07:30 Sodexo Q3 2010 Sales and Revenue Call
Construction & Materials 08:00 CRH PLC Q2 2010 Sales and Revenue Call - Trading Update
Support Services 09:00 Carillion PLC Interim 2010 Sales and Revenue Call
Construction & Materials Marks & Spencer Group PLC Q1 2011 Sales and Revenue Release - Interim Management Statement
General Retailers Tullow Oil PLC Q2 2010 Sales and Revenue Call - Trading Update
Oil & Gas Producers 07:00 3i Group PLC Q1 2011 Sales and Revenue Release - Interim Management Statement
Thu
Travel & Leisure 04:00 Sodexo Q3 2010 Earnings Release
Support Services 07:00 Hays PLC Q4 2010 Sales and Revenue Release - Trading Statement
Financial Services 07:00 Man Group PLC Q1 2010 Sales and Revenue Release - Interim Management Statement
Food Producers Associated British Foods PLC Q3 2010 Sales and Revenue Release - Interim Management Statement
Fri
Support Services 07:00 Michael Page International PLC Q2 2010 Sales and Revenue Release - Trading Update
Banks 07:00 DnB NOR ASA Q2 2010 Earnings Release 1.689
Travel & Leisure Deutsche Lufthansa AG June 2010 Sales and Revenue Release - Traffic Statistics
Source: Lloyds Corporate Markets Economic Research, Bloomberg
3
4

Sector-Related Economic releases

Country Time Event Comment

Mon
UK 09:30 PMI Services - June This survey continues to signal robust activity in the private service sector, but growth in new business seems to be moderating.
EC 09:30 Sentix Investor Confidence - July The Sentix survey rose unexpectedly last month, but concerns about the global growth outlook means that another fall cannot be ruled out.
EC 10:00 Euro-Zone Retail Sales - May Euro-zone retail sales are likely to remain sluggish, as the recovery in consumer confidence through 2009 has ran out of steam this year.

Tue
New car registrations rose 13.5%y/y in May, but end of the car scrappage scheme and headwinds for the consumer mean that the coming
UK - New Car Registrations - June
months are expected to be challenging.
The US economic recovery is broadening out to the service sector, as the improvement in the labour market continues. However, the European
US 15:00 ISM Non-Manf. Composite - June
sovereign debt crisis has dampened global growth prospects.
Wed
UK 00:01 BRC June Shop Price Index Overall shop price inflation is expected to remain moderate, thus retailers are likely to focus on increasing market share and reducing costs.
German factory orders will be given a further boost by the weakening of the euro in recent weeks, though the global growth outlook is also
GE 10:00 Factory Orders - May
important and is a downside risk.
Thu
UK 09:30 Industrial Production - May Survey evidence from the PMI suggests that manufacturing activity remained strong in May, helped by the impact of previous falls in the pound.
The German manufacturing sector is more geared towards the higher value-added capital goods sector than its UK counterpart. The weaker
GE 11:00 Industrial Production - May
euro should support the sector.
US 15:30 ICSC Chain Store Sales - June Gradual improvements in the labour market should support chain store sales, though there was a sharp fall in consumer confidence last week.
Fri 18
UK 09:30 Visible Trade Balance - May Volume of exports in basic materials have risen sharply in the past quarter by 25%, with rises also in consumer goods and chemicals.
UK 09:30 PPI – June Manufacturers’ costs have risen due to higher global commodity prices and a weaker pound.

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