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Good morning,
Markets are called to open higher this morning. This is what's happening today:
The DAX is expected to open at a 52-week high, now trading 29.76% higher Year-to-date. The Topix has climbed almost 10% in the last month, the most among broad developed nation gauges, as incoming prime minister Shinzo Abe presses for more easing from the Bank of Japan, which ends a two-day meeting tomorrow. The CAC has also had a good run this year, now trading up 15.47% YTD.
In the US House Speaker John Boehner offered a backup plan that would raise tax rates for Americans making more than $1 million a year, as he seeks compromise between fellow Republicans and the government.
Despite the equity markets having a decent run this year, I expect further strengthening in 2013, especially in the European markets which are now trading at a large discount compared to the American markets. We are already seeing money flow out of the Dollar and into Euros as investors are moving their investments out of the US and into Europe. This is being done not because they are worried that a decision on the fiscal cliff won't be reached. If that was the case we won't be seeing a rally in the markets across the board but red all over the screens. Investors are appreciating the fact that although there are problems in Europe, they will be solved and the discount for the risk taken is more attractive now when compared to US corporates than it was at the beginning of the year.
But equities will keep on rallying especially in Q113. It would normally be hard to make a case for further strengthening in the DAX in 2013 when it is up 30% YTD. But the truth is even though the DAX is up 30%, equities were not the best performing asset class for 2012. High yield bonds were the best performing asset class. Those investors that are exposed to high yield can afford to have an exposure to equities in their portfolio because the risk of the two isn't that different. So what I expect going into 2013 is for investors to start selling out of high yield and into equities. Just like we are seeing investors shift out of the Dollar and into Euro. Why? Becuase it makes alot of sense.
There is little more one can squeeze out of high yield. Whereas despite the good performance in equities, they are still trading below their long term average. Not only that but we are getting positive news out of the global economy. Economists and analysts are already increasing their growth forecasts for China. China’s economy will grow at a faster rate next year, according to 67% of money managers in a monthly survey by Bank of America Corp. The ratio was the highest since the survey data started in 2003. Chinese corporate earnings are set to climb as much as 10% next year, Russell Investments says.
Japan is also looking interesting now that the Liberal Democratic Party is in government. The market expects the LDP to carry out stimulus measures and this is being reflected in the weakness of the Yen. A weakening Yen is what the Japanese economy needs to compete with the rest of the world. We are expecting the Japanese government to announce stimulus any time now, after they end their two-day meeting today. Check out Lyxor ETF Japan if you want a Japanese exposure in your portfolio.
There are still alot of question marks on the European economy, so why is the market so enthusiastic all of a sudden? The truth is the investors look beyond 2013 and buys stock cheap today to be able to take advatage of capital gains as the European economy starts to generate growth post 2013.
I think at this point in time and forecasting what will happen in 2013 and beyond, I strongly believe that equities will be one of the best performing asset classes in 2013. The writting is on the wall. What you need to do is make sure that your portfolio matches your risk-reward ratio so that you won't have any unexpected surprises to the downside.
I'd like to end this blog with a comment on Apple. We are seeing alot of swings in the share price and investors are confused. I think the weakness in the share price has nothing to do with what demand for Apple products will be in H213. I think all the volatility is coming from investors crystalizing the gains on Apple this year and paying a lower tax rate than if they had to do the same next year. I wouldn't be surprised if Apple goes back up to the $700 post results. So hold on, you have to ride the rough times to be able to benefit when things turn around. Don't stop believing. You have to see beyond the short term technicals which shift the price. You have to believe in the long term story of the company to remove the doubt and understand that is company is ridiculously cheap. Keep on believing, I am confident 2013 is the year for Apple.
Stock to watch: Hunting (Price 756p, Price Target 1000p)
Deutsche Bank comments: Hunting's business has evolved and expanded over time – from aircraft servicing and Canadian mid-stream to shipbroking, E&P and drilling consumables. As a result, leverage to some of the most attractive secular growth themes in global oil services – the US unconventional revolution, recovery in GOM activity levels, internationalisation of shale gas and rising drilling intensity in international basins – is much enhanced. Hunting has weathered the shift from gas to liquids-rich plays better than its peers, and with gas drilling activity looking like it's bottoming, this market should be an accretive growth driver to 2015. We also think the market underestimates the positive impact that a return to activity in the Gulf of Mexico should have on Hunting's products and overall industry pricing, which we believe will drive both margin and revenue growth beyond expectations. Hunting has outpaced the growth in its end markets by 12% on average annually since 2005, with capacity nearly tripling in just three years. Further increases in capacity, continued growth in manufacturing efficiency and the higher-value, complex product lines now dominating the portfolio are growth drivers that provide confidence in further gains ahead of expectations regardless of the macro. Buy.
For further information on Hunting or other stocks and bonds we follow, contact our offices on 25688688.
Good day and happy trading!
Kristian Camenzuli
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