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Good morning,
Markets are called higher in Europe this morning. This is what's happening today:
It is ironic to think that the Chinese markets turned negative after good results came out of the property market. The positive news about property prices in China lead investors to believe that the Chinese government will delay stimulus. The delayed stimulus caused panic in the market and investors started selling off stock.
This is a clear case of wanting to be a contrarian in the market and pick up stock in times of weakness. The markets are too focused on institutional leaders and their say in running the economy. The market believes that the only way out of the problem is through stimulus. They are partly correct. The point which I disagree with is the negativity in the markets when positive news come out which could delay stimulus. What the investor fails to take into account is the negative repercussion of any form of monetary easing in the long run. The investor is more worried about short term profitability than he is in long term returns. And this mentality is mainly brought about by fund managers who are more interested in their short term perofrmance rather than in the performance of the portfolio in the long term.
Although the small investor may feel at a disadvantage to a well established fund manager, this is one of the cases where the investor has an opportunity over the fund manager. That is the individual investor has the luxury of being patient and waiting for the markets to settle and for time to take its course. I still continue to believe that every portfolio should have exposure to China. Even if stimulus doesn't come in the immediate short term because the economy is improving without government intervention, I am convinced the government will intervene in the case monetary easing is necessary. The Chinese economy is the future. It has ample resources to stimulate the economy and it is still growing at a rate above 8% which has been critisized by many analysts though at the end of the day, considering all the problems in Europe and the US, is still a great annual growth rate.
This week is an important one for Europe because there is the ECB meeting. The markets are expecting Draghi to come up with some form of easing to kick start the European economy, As opposed to China, Europe does need immediate help from the ECB, however, the tools available to the ECB are very limited compared to China making it much easier for analysts to guess what the ECB could do to stimulate the economy than it is for analysts to predict what the Chinese government will do.
Any form of easing coming out of Europe should weakned the Euro. However, since we have seen so much negativity out of Europe lately, an positive news results in a rally in anything that is European. Of course this reasoning doesn't make much sense and the market will correct some time after. Any form of easing in theory should lead to a weaking of the Euro and not a strengthening of the currency. One must keep a look out on any stocks which have come up more than is justifable and consider taking profits and moving into something else.
I remain overweight the Dollar vis-a-vis the Euro at this point in time. However, I do encourage investors to reduce their exposure to the Dollar and start build up positions in Euro. There are alot of European companies that although are demiciled in Europe are multinational companies with a small fraction of their sales coming from Europe. Having said that, I remain focused on US bluechips which keep on giving positive and decent returns in both the short and long term. Stocks we like include Apple, Amazon, Google, SAP, JP Morgan, Wells Fargo etc. For a complete list of our equity picks, contact our offices on 25688688.
Stock to watch: AMEC (Price 1122p, Price Target 1225p)
For us the AMEC investment case is clear: (1) Absolute and relative valuation are undemanding, with upside to a DCF-based target. (2) We expect AMEC to generate strong earnings growth in coming years – a 9% CAGR across 2011-15E (ex buyback). (3) We believe that AMEC has the capacity to comfortably meet their Vision 2015 earnings target, we etimate 109p/sh in 2015. 4) We believe that the diversity of growth sectors and geographies offers stability. (5) We regard balance sheet strength (end-2012E Net Cash of £200m post-buyback) as a positive differentiator in the current environment. In short, beyond incremental events which move the company in the intended direction of achieving a more efficient capital structure, we believe the attraction of the investment case lies in the anticipated steady delivery of the long-term growth promise, defensiveness (multiple end-markets, strong balance sheet) and a valuation which presently fails to appreciate these points. BUY.
For further information on AMEC or other stocks and bonds we follow, contact our offices on 25688688.
Good day and happy trading!
Kristian Camenzuli
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