Good morning,

Markets are called higher this morning in Europe. This is what's happening today:

  • Investors are confident that there will be more stimulus in China and the US;
  • HSBC are indicating that China’s manufacturing may be contracting at a faster pace this month;
  • Chancellor Angela Merkel hosts President Francois Hollande today as officials look for ways to stave off an immediate crisis after a report due next month from Greece’s international creditors on the health of its finances;
  • 10-year Italian debt is trading at 5.66%, 10-year Spanish debt is trading at 6.274% and 10-year Portuguese debt is trading at 9.265%;
  • Brent is trading at $115.88/barrel;
  • Apple closed the session at $668.87

Markets are rallying this morning on speculation central banks in the U.S. and China will ease monetary policy to support growth. Minutes of the U.S. Federal Reserve’s last meeting showed many members favored more stimulus unless the pace of the economic recovery picks up. People’s Bank of China Governor said adjustments to interest rates and banks’ reserve requirements are still possible after the central bank stepped up temporary cash injections this month.

A preliminary report today showed China’s manufacturing may contract at a faster pace in August. China’s manufacturing may be contracting at a faster pace this month, signaling more monetary and fiscal stimulus may be needed to secure a second-half rebound in economic growth. A preliminary reading of 47.8 for a purchasing managers’ index released today by HSBC Holdings Plc and Markit Economics compares with July’s final 49.3 figure. If confirmed, it would be the lowest level since November and the 10th month that the reading has been below 50, the longest run in the index’s eight-year history.

Investors are banking on more stimulus from the US, China and Europe. It is not the positive data that is driving the markets up. On the contrary, the data that is coming out is negative. What is driving the markets higher is the hope that governments will intervene and stimulate their economy. Let's start off with the US. Every meeting we hear the same words from the Fed. That is, they are in favor of further stimulus if the situation in the US doesn't improve. We've heard this statement everytime the Fed has a meeting and the truth is everytime there is a meeting the situation doesn't improve from the previous meeting. What the Fed is doing is delaying further stimulus until the election is over. In fact, many analysts are predicting that there will be further expansionary monetary policy in the US at the beginning of next year, after the elections take place in the US in November. Ironically Bernanke had said earlier on this year that in order for the unemployment rate to come down further, the Fed has to intervene. We have seen no move from the Fed since then. Just the same old story as the Fed plays for time till the elections take place in the US.

Then there is China. Growth in China is slowing. But what do you expect? Exports from Japan are slowing, Europe is in a recession and although the situation in the US is much better than that in Europe it still isn't ideal! But don't worry about China. A growth rate of 8.5% for 2012 is more than satisfactory in a world that is in recession. Additional positive points for China is that the Chinese government has ample ammunition to fit the crisis unlike the US and Europe. So if you have to worry about something, worry about Europe, but don't worry about China!

And lastly there is Europe. The positive about Europe is that valuations are much more attractive than their US peers and the markets are betting on further stimulus from the ECB after Draghi was quoted saying that he will do all he can to save the Euro. What is amusing about all of this is that we've been hearing these same words from all the EU leaders for the past two years and yet the situation in Europe just gets worse and worse because no one does nothing. This is like the gamblers fallacy. A gambler who goes to the casino and tosses a coin thinks that the probability of getting a tails is greater if the first time the coin was tossed he got a heads. This is incorrect because the probability remains 50-50 each time the coin is tossed. The same happens with investors. Each time they hear something positive from EU leaders they give it more weighting hoping this time it will happen. The truth is, unless the ECB changes its mandate, EU leaders are limited in what they can do and the problems Europe face will stay with us for years to come.

This is why portfolios need to hold US blue chips and an exposure to China. Of course it also makes sense to hold some European names because lets face it, many European companies are just listed in Europe but most of their sales go to China, the US etc. Look at Nestle as an example. Most people associate Nestle with Europe, though most of its sales are to countries outside of Europe. Although the markets have come up, there is still room for the markets to go up further especially if governments start to deliver. A must in every portfolio is an exposure to China and if you want exposure to Europe, you have to start off with the DAX. You can add exposure to individual names depending on the size of your portfolio. But if the size only limits you to one name it has to be the DAX for diversification purposes.

Stock to watch: Rexam (Price 425.80p, Price Target 480p)

Rexam is a global consumer packaging company headquartered in London, England. The company has two primary businesses: (1) beverage (metal) can packaging and (2) plastic packaging. The two businesses represent 80% and 20% of sales, respectively. Rexam has placed increasing focus on the beverage can business, which has limited cyclicality and enjoys relatively rational competitive behavior. We believe that Rexam's is an underappreciated turnaround story. We have increasing confidence in management's ability to hit stated targets, improve ROCE as a result of improved utilization and the sale of its personal care business, and generate strong free cash flow in the years ahead. Rexam should also have significant opportunity to grow the business through increased volumes in specialty cans, increased can penetration levels, and growth in emerging markets. We have confidence in current management's ability to maintain capital discipline while continuing to take advantage of above-trend growth opportunities. Under CEO Graham Chipchase, we believe Rexam will continue to focus on returning cash to shareholders. In fact, Rexam currently pays the highest dividend yield in our rigid packaging space at 3.6%. We believe the sale of Rexam's personal care business (part of its plastics business), could result in a special dividend for shareholders. We see upside to current trading levels and rate the stock a Buy.

For further information on Rexam or other stocks and bonds we follow, contact our offices on 25688688.

Good day and happy trading!

Kristian Camenzuli