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Broadgate: Weekly Briefing 30/7

30 July 2012

Europe – European stocks were climbing on Friday after a four day sell-off in the week, following a pledge from European Central Bank (ECB) president Mario Draghi that the ECB will “do whatever it takes to preserve the euro”.

Indices across Europe surged as Draghi repeated comments made to Le Monde newspaper last week that the euro is “irreversible”. He added: “Within our mandate the ECB is ready to do whatever it takes to preserve the euro, and believe me, it will be enough.

“When people talk about the fragility of the euro, very often non-euro members underestimate the political capital that has been invested”.

Germany – Credit ratings agency Moody’s has changed its outlook for Germany’s AAA credit rating to negative, the first step towards a possible downgrade.

Moody’s said the country was at risk from the increased likelihood of a Greek exit from the euro and the need to provide more support to Spain.

Concerns are growing that Spain will have to seek a full bailout.

The Netherlands and Luxembourg, both AAA rated economies, were also put on negative watch.

Spain – France and Spain have called for European Union (E.U.) leaders to accelerate a rescue plan for Spanish banks to calm fears of a full international bailout.

Spain said there had been a “worrying delay” in executing plans agreed by eurozone leaders last month.

The main provision would allow the future European bailout fund, the ESM, to pour money directly into ailing banks.

China – The International Monetary Fund (IMF) has warned that the worsening debt crisis in the eurozone poses a “key risk” to China’s growth.

The IMF added that China also faces domestic risks, not least from a sharper-than-anticipated decline in the property market.

However, the fund said China had ample room and the fiscal tools “to respond forcefully” to any such developments.

Commodities – Gold held steady above $1,600 an ounce on Friday, on course for its biggest weekly gain in almost two months, after ECB President Mario Draghi signalled the bank would do whatever was necessary to hold the euro zone together.

Gold in the past few months has moved largely in tandem with the euro and riskier assets, with a relentless debt crisis in the euro zone chipping away at bullion’s safe-haven appeal and investors piling into assets perceived safer, such as the dollar, yen and U.S. Treasuries.

Spotlight on: Hosting the biggest sporting event in the world

Neptune fund managers Douglas Turnbull, Mark Martin and Thomas Smith consider the economic impact of the upcoming London Olympic Games & also the plans afoot in South America to host the 2016 games.

London 2012

The London Olympics is projected to rank alongside Beijing, Barcelona and Montreal as the most expensive in history. The total London 2012 sports-related budget has increased by 101% from GBP4.2 bn in the 2005 bid to GBP8.4bn in real terms, according to research by the Said Business School.

The benefit of much of this expenditure, however, will already have been felt by construction companies. Looking forward, house builders appear to be the construction companies poised to benefit most from the upgrade in facilities and infrastructure at the Queen Elizabeth Olympic Park: as many as 5,000 new homes could be built in the area after the Olympics.

It is estimated that 500,000 extra people a day will descend on the UK capital and as a result there will undoubtedly be an impact on businesses. Companies exposed to London tourism, such as pub companies like Fuller Smith Turner and Greene King should benefit, especially if they have patriotic brands like Spitfire, London Pride and other UK drinks on tap.

Hotel companies exposed to London and the South should also benefit – Whitbread and Fuller Smith Turner [again] should profit from more people seeking London accommodation who are prepared to pay a premium price. Also we should not forget support service companies like UK-listed Berendsen, which supplies linen to the catering and hotel trades, which could also see increased demand for its products.

Unfortunately, not all businesses will be as well positioned. For theatres and cinemas the month of the Olympiad and the recent Euro 2012 fixture means that cinema admissions are likely to be depressed. Indeed cinema operators such as Cineworld have specifically structured their film release schedule this summer.

However, for all but the shortest-term investors, the beneficial impact of the Olympics on individual stocks will likely be muted. Given that the majority of any stock’s value is contained in earnings streams way into the future, the fundamental value of a company will be totally unaffected by a ‘pop’ in one quarter’s earnings.

Rio de Janeiro 2016

The 2016 Games are of particular significance because although the Olympics were held in Mexico City in 1968, they have never been held in South America, giving further recognition of Brazil’s arrival on the world stage.

The total benefit for a country hosting the Games is difficult to quantify due to the many indirect investments alongside the direct investments in Olympic stadiums and infrastructure.

A study by the Brazilian Ministry of Sport in conjunction with the University of Sao Paulo estimates that $14.4bn will be invested in Olympic preparations ranging from stadiums, sports pitches and water sports venues to roads, subways and airports.

However, the study also claims that the preparations will generate a 4.26 production multiplier, which will inject $51.1bn into the Brazilian economy from 2009 to 2027 and create over 120,000 jobs annually. This means that for every dollar invested in the organisation of the Olympic Games, private entities will invest an extra $3.26 in production chains related to the event.

The accelerated investment in projects such as airports and roads will help remove infrastructure bottlenecks and raise Brazil’s trend growth rate over the medium term.

Rio also stands to benefit from the preparations for the 2014 Football World Cup and having the Olympic-standard facilities built prior to hosting the Pan-American Games in 2007 which will be used in both the Olympics and Paralympics.

Rio was the 2016 candidate requiring the smallest investment in venue construction, allowing it to focus on the much needed infrastructure to transform the city.

Transportation is a priority with new highways being built to link the airport to key points in the city as well as an extension to the city’s subway. The sectors likely to benefit most include construction, real estate, oil and gas, transportation and communication.

A mega event such as this can be very positive for a country’s economy but this is not always the case. Following the 2000 Summer Olympics, Australia was still paying around $40m a year to maintain under utilised stadiums and facilities a decade later.

The information set out herein has been obtained from various public sources and is by way of information only. Broadgate Financial can accept no liability of any sort in relation thereto and readers should obtain their own verification of any statement before making any decision which may have any financial or other impact.

Neither the information nor the opinions herein constitute, or are they to be construed as, an offer or a solicitation of an offer to buy or sell investments.

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