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Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories: Euro crisis to be over soon, but for good or ill? China urban population exceeds rural population. John Lewis economy is no panacea, says John Lewis. Companies in the news: Bovis

Euro crisis to be over soon, but for good or ill?

And still we get this massive gap in the two views on the Eurozone.

Bear:     Yesterday, Capital Economics began forecasting an inevitable breakup of the euro. It stated:  “The Eurozone is slipping into a recession which we expect to be deep and prolonged and to result in the break-up of the single currency area.”

Bull:       Yet the ‘Telegraph’ quoted HSBC Chairman Douglas Flint as predicting the euro crisis will be solved by the second half of this year. He said: “The market needs to recognise that there is a mechanism to enforce fiscal discipline and there is a shared burden of fiscal responsibility and transfer. It would be naive to think that this can be solved within weeks, but my view is that it will be a reasonably short timeframe, certainly by second half.”

Bear:     But Credit rating agency Standard and Poor’s was not so impressed. Now it has only gone and cut the credit rating in European Financial Stability Facility’s (EFSF). Actually, the move should not have been surprising because the maths is pretty clear. The EFSF is only as strong as the countries of which it is made. And since S&P has downgraded the rating for France and Austria, it was pretty logical for it to downgrade the bailout fund.

The plan was for the EFSF to gain leverage based on its initial capital, so that it could pour money into troubled Europe. But as the BBC’s Robert Peston quite eloquently put it, the funding now available to the fund looks like “a puddle or pond, rather than a great sea of money stretching beyond the horizon.”

Bull:       But S&P did concede that the EFSF could have its triple A rating restored if it obtained more guarantees.

And on that note, Michel Barnier, the European Commissioner for Internal Markets, said that he was “surprised by the timing of these announcements”, and “I think ratings agencies should take more account of the efforts being made by governments.”

Conclusion:        Sorry, but we are seeing the same old same old. The Euro is in crisis in part because the currency is too expensive for some countries to retain competitiveness.  As things stand, a very deep economic depression threatens to descend upon the region. That is why it does seem pretty likely that the euro will break apart and we will see the emergence of two Eurozones. One will consist of Germany, Netherlands, Finland, Luxembourg and maybe Austria. The other will consist of the rest, perhaps minus Greece, and perhaps (as The Share Centre’s Gavin Oldham has suggested) minus Ireland, which may yet ultimately join a sterling zone along with an independent Scotland.

But Germany absolutely does not want such an outcome. Just like China, Germany wants a cheap currency to help its exports. And a new euro north will not be cheap.

And so it all boils down to what Germany wants. Either it throws its money at saving the euro, but that will include transfer payments into the troubled economies, or perhaps massive stimulus packages for the southern euro countries. If it does not do this, social unrest would simply be too great. Alternatively, Germany says enough, and just accepts that it must either bring back the Deutsche mark, or allow the euro to split into two.

China urban population exceeds rural population

It has been argued here many times, that the point at which China runs out of workers to migrate into towns – also called the Lewis Turning Point – will be a key moment for the global economy.  At that point, wages in China will increase and Chinese consumption may well rise; we may see less saving in China, and as a result less Chinese money will slosh around money markets. Ultimately, as a consequence we may see higher interest rates across the world. The bulls can say of The Lewis Turning point that it may mark a change in the global economic cycle with higher wages around the world being the end result. But the bears may point out that higher interest rates may follow, too.

According to China’s National Bureau of Statistics there was a 21 million increase in the number of people living in China’s towns and cities in 2011, and a 14.56 million fall in the rural population. The urban population is now 690.79 million, while the rural population is 656.56 million. In other words, it is now the case that more Chinese live in urban areas than in the country.

In 1949 no less than 89.36 per cent of China’s population lived in the country. In 1979 that ratio had fallen to 81 per cent, according to a report on Bloomberg. China Urban Population Exceeds Rural

Of course, the above stats do not suggest China is running out of countrywide workers to move into towns – not yet.

But bear in mind that a good chunk of the rural population commutes into towns, perhaps staying there for a few months before moving back home. The likelihood is that China will pass the Lewis Turning point later this decade.

John Lewis economy is no panacea, says John Lewis

Nick Clegg wants to have more companies run like John Lewis. And, frankly, at face value that seems like a very laudable objective. And actually, even if you dig deeper, Mr Clegg’s argument is strong and makes at least some sense.

But companies that are wholly owned by staff do have weaknesses. Who says so? Well, none other than Charlie Mayfield, Chairman at John Lewis.

The ‘FT’ quoted him as saying: “I think that a more plural approach to ownership could play an important part in a vibrant and prosperous economy…But I don’t believe the John Lewis model is a panacea. It is not right for everybody.” Bear:     The point is this: when a company is 100 per cent owned by shareholders, it is much harder for that company to go out and raise money. And, of course, it is impossible to do so by selling shares, unless its financial backers are staff too.

There are other snags. It may make less sense for a company to expand if that, in turn, means more staff and more shareholders.

John Lewis is a wonderful store, but seeing things from the point of view of its current owners – staff – would it make sense for the company to expand overseas, as any resulting rise in profits and thus dividends will have to be shared among the additional shareholders who are also created?

And also bear in mind that John Lewis wasn’t always quite so impressive. Not so long ago it was closed on Sundays and Mondays, and didn’t take credit cards. It was as if it was run for the convenience of its staff, rather than for profit maximisation.

Conclusion:        Maybe that was no bad thing. Certainly one can have sympathy with the view that Sunday opening has been a negative development – for the staff who have to give up Sundays it might seem that way.

But the point is this, from the point of view of making money, and generating returns, a company that is not wholly owned by staff is not always superior.  However, companies that are partially owned by staff, now that is interesting.

Companies in the news

Bovis was the company under the spotlight this morning, with both Questor in the ‘Telegraph’ and Tempus in the ‘Times’ taking a look.

Home building is up, profits are predicted to rise sharply, and Questor likes the company. “The UK is structurally short of housing,” it said and then remarked on the fact that the UK does not have the swathes of empty housing one can see in Ireland or the US. it then talked about government plans “to bolster the construction of new homes with investment and mortgage guarantees.” And for those reasons it said buy.

Tempus was more reserved and could only bring itself to say hold.

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees