Good morning,

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

  • The Dow finished the past week at 13,211.96, up 1% for the week and closing the first quarter with a 8.14% gain, its best first quarter since 1998. The S&P 500 was at 1,408.45, for the week and up 12% for the quarter;
  • European governments capped a fresh rescue lending at €500 billion. Adding the €300 billion already committed to Greece, Ireland and Portugal, euro-area finance ministers put the overall size of the firewall at €800 billion;
  • China’s Purchasing Managers’ Index rose to a one-year high of 53.1 in March, China’s logistics federation and the National Bureau of Statistics said yesterday. The gauge has a pattern of rising each March. In contrast, a PMI from HSBC Holdings Plc and Markit Economics showed manufacturing contracting and export orders falling;
  • Chinese markets are closed for a holiday today;
  • A government report last week showed that Japan’s industrial production unexpectedly dropped in February after previously rebounding as disruptions from flooding in Thailand faded away. Policy makers are counting on reconstruction spending after last year’s earthquake and tsunami to help propel a rebound from a contraction in 2011;
  • US non-farm payroll data out at the end of this week. The March Jobs report out of Friday when the market is closed;
  • President Barack Obama vowed on Friday to forge ahead with tough sanctions on Iran, saying that there was enough oil in the world market, including emergency stockpiles, to allow countries to cut Iranian imports;
  • 10-year Italian yield at 5.116%, 10-year Spanish yield at 5.353% and 10-year Portuguese yield at 11.529%.

Markets are called higher this morning but it is not a surprise. It is a calendar anomaly that shares trade higher on the first trading day of a new quarter. This is because at the end of the quarter managers are more worried about paperwork to close off the period rather than focus on trading in these markets.

Chinese PMI for March came in much better than HSBC was predicting, however the country has suffered from lower exports to Europe. Premier Wen Jiabao has pledged to fine-tune economic policies as needed as weakness in export demand and a cooling housing market restrain an economy that probably grew at the slowest pace in almost three years in Q112. GDP probably expanded 8.4% in Q112 from a year earlier, according to the median estimate of analysts surveyed by Bloomberg, down from 8.9% in Q411.

Morgan Stanley joined Nomura Holdings Inc. and Deutsche Bank AG in raising its forecast for China’s economic growth this year. Such projections, still below last year’s 9.2%, offer little comfort for Australian mining company BHP Billiton Ltd., seeing slower steel production in China, or German automaker Daimler AG, whose Mercedes dealers in the nation are giving record discounts.

In Japan there is worry that the Yen could rebound against the Dollar. BOJ may consider expanding its asset-purchase program if the yen moves drastically against the Dollar. BOJ policy board members are scheduled to meet April 9-10 and April 27. The central bank held off from expanding asset purchases at its meeting in March as it monitored improvements in the economy. It expanded bond purchases by Y10trn and set a 1% inflation goal in February. Consumer prices excluding fresh food rose 0.1% in February.

In Europe, EU leaders agreed on increasing the firepower to E800bln. This shouldn't have an impact on the markets this morning because it was expected.

Some analysts have been calling for a pullback which hasn't happened yet. Bernanke had something on his mind the last time he addressed the markets. Bernanke said that in order for the economy to continue growing and in order for unemployment to keep on decreasing, there is need of further quantitative easing. This makes me think whether the March Jobs report will be a negative surprise to the markets. In Q212 we will get economic data for Q111 and we will start seeing certain economies weaken. It all depends on how governments and central banks will move to cut rates and pump money in the economy.

Expansionary monetary policy is the buzz word of the moment. China, the US, Japan, the UK, the Eurozone, all depend on expansionary policies in order to continue growing. A stronger Yen needs the government to buy back government bonds to inject money in the economy and weaken the currency. China needs it to make up for lower demand from the EU. The Eurozone needs it because it is going to go into recession in 2012. The UK has low growth, high unemployment and a high budget deficit. It too needs to generate jobs and stimulate growth.

Countries cannot depend on other countries to improve their situation because the developed world economies are slowing down and this is also filtering through emerging markets. I am confident that most economies will carry out expansionary monetary policy particularly in China. However, if negative data starts to come out, the markets will be hit negatively and the momentum to the upside will be halted until governments intervene.

My opinion to an investor is to stay long the market despite this period of uncertainty because if a correction had to come it wouldn't be dramatic and the correction will only hold till government intervene. If you crystalize a profit, it will be hard to time when to get back into the markets.

Last Friday I said that I was bullish on China and Russia as opposed to Brazil in particular which has a very low growth rate compared to other emerging markets. The ETFs for China and Russia one may look into are:

  • Ishares MSCI China Index ETF (ISMUF US EQUITY) – USD
  • Ishares MSCI China Index ETF (ISEC GR EQUITY) – EURO

Stock to watch: Deutsche Post (E11.60, PT E17)

Raising from HOLD to BUY with target price at EUR17 (from EUR11.6) On our new forecasts, our SOTP target price rises from EUR11.6 to EUR17, due to a combination of 1) higher forecasts 2) Higher DCF valuation of mail, given more clarity on cashflows and 3) re-rating of peer multiples used to value express, supply chain and freight forwarding divisions. DP DHL is trading on a 2013 PE and dividend yield of 10.1x and 6.2%. Given more visibility on mail and earnings momentum, we expect the shares to re-rate significantly and hence rate stock a BUY. Risks include a failure to remove mail costs quickly, difficulties in negotiating with mail labour unions, and increasing competition in the European Express market

For further information on Deutsche Post or other stocks we follow, contact our offices on 25688688.

Good day and happy trading!

Kristian Camenzuli