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Good morning,
Markets are called lower this morning. This is what's happening today:
Spanish Prime Minister Rajoy upset the markets once again when he came out saying that Spain will not be asking for any bailout money in the near term. Traders were speculating that the bailout request could come as early as this weekend. What's even worse is that Moody's will come up with a revised rating on Spain by the end of this month because the agency is of the opinion that in an adverse scenario, Spain would need double the money Spain is saying its needs to boost the capital of its banking system. Moody's are saying that in a adverse scenario, the capital would need to be increased from the reported E70b to E105b. This is definitely not what the markets need in times of uncertainty. We are seeing the markets lose part of the gains we have seen last month when markets rallied on optimism that the money being injected by the ECB will be beneficial for the EU as a whole. Like I have said in the detailed report on the markets published last week, there are still alot of question marks regarding how the ECB will actually go about buying Italian and Spanish 2 and 3 year paper. Investors are realising this and we are seeing the markets sell off the gains it has built during the month of September.
We need more visibility and to have visibility we need the EU leaders to stop creating doubts in the markets. All this uncertainty is just causing greater volatility in the markets. First the cry for Spain to put its head down to the markets and ask for a bailout. Then we hear that the Germans don't want the Spanish to ask for a bailout just yet because it is possible that Spain needs less money than it is estimating it needs. What's ironic about all of this is that today Moody's came out saying that the E70b which Spain estimated is needed to inject into the banking system could be low and the figure in an adverse scenario is closer to E105b. Not only that but because of the seriousness of this assumption, Moody's will be reviewing Spain's credit rating this month.
What I don't understand in all of this is that EU leaders keep on creating uncertainty in the markets when in the end we know that there is no way the ECB will let Spain default on its payments. Spain has E28b worth of debt maturing this month. So why create all this uncertainty in a market that has been hit hard time and time again since 2007?
Trading this market becomes harder and harder as time goes by because after coming up with a valuation on a company and concluding that there is alot of value to be made, we can have the Spanish Prime minister come out and say that the country will not be asking for bailout money at this point in time. So irrespective of how cheap a stock may seem, it will fall even further. Having said that, investors need to be patient because we have seen stocks get hammered but when there is some positive news we see the markets rally like there is no tomorrow.
The best way to go about stocks in these markets is by taking a top down approach. What you have to start off with is an idea of an economy which will distort in the least the potential value of a company. Working on a bottom up approach is useless if you have governments install uncertainty into the economy. The stock will get hammered no matter what.
Gone are the days when all stocks rally at the same time. It is imperative that a portfolio is well diversiified in order to be able to survive the volatility in these markets. Calamatta Cuschieri's equity list offers a wide selection of blue chip companies in different sectors which in our opinion are trading below their intrinsic value. Though I strongly advise that clients meet up with their advisers before concluding on whether or not a stock should be added to a portfolio. Even professional investors should do the same. Discussions on whether a stock should be included in a portfolio are healthy no matter on the level of education of an investor. The amount of information out there is endless and continuously changing so it would be wise to also challenge a thought process in order to see if others are in line with your way of thinking.
Regarding currencies, we are seeing the EURUSD hover around the $1.29 level as investors wait an see when and if Rajoy will formally ask for bailout money. It is very likely that despite short term weakness in the Euro because of uncertainty, we will see a rebound in the Euro because as I said before there is no way the ECB will let Spain default of its payments. Of course the strength in the Euro is all short term. It is being pushed higher because of quantitative easing taking place in the US. On the other hand when a country asks for bailout it means the country has serious problems. But the Euro will still rally short term irrespective of this because any good news in Europe is appreciated by investors since we don't get much good news out of Europe.
Stock to watch: Unibail Rodamco (Price E160.10, Price Target E203)
We expect the group to continue to outperform the broader pan-European property sector owing to its above-average organic growth, exceptionally cheap debt and strong capital discipline-Buy. We expect the group's high exposure to continental European shopping centres should prove relatively defensive over the next twelve months, particularly given its relatively high quality and limited exposure to the eurozone periphery. The group's committed development portfolio has a strong skew to the defensive shopping centre sector but the group retains optionality on a future recovery in the more cyclical office centre through develoments it controls but to which it is not yet committed.
For further information on Unibail Rodamco or other stocks and bonds we follow, contact our offices on 25688688.
Good day and happy trading!
Kristian Camenzuli
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