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Good morning,
Markets are called higher this morning. This is what’s happening today:
Today is the last trading day of the first quarter of 2012. It also is the best quarter we have seen in decades. Year to date, the DAX is up 16.56%, the CAC is up 7% and the FTSE is up 3.05%. This is a very good performance from the start of the year. We have seen some weakness in the markets over the last three days though this is normal. When there is momentum in the markets, it doesn’t mean the markets will go up in a straight line. There will always be those days of weakness when there will be some profit taking and it is those days that are buying opportunities in the markets. Every down day is a good day to get back into the markets and this is on the basis that fundamentally, equities are cheap compared to their historical average. We are trading on a PER of 13x compared to a historical average of 17x since the 1970s. Plus there are certain sectors which should continue to show improving margins, stronger cash piles and attractive P&L and Balance Sheets. I’m talking about multinational companies such as Apple, Priceline, Intel, Microsoft. Apart from these there are emerging market ETFs in China and Russia which should do well for the rest of 2012.
Don’t wait on the side lines expecting the markets to go down 10% in a pullback. It isn’t going to happen. The markets are still undervalued and governments will intervene to stimulate growth. Today EU finance ministers will be meeting to decide how to increase the firepower of the Eurozone. The Germans are calling for a firepower of E800bln though this would not be enough to bailout Italy and Spain if the need arises. What the market is calling for in order to be able to stop contagion in the Eurozone is another LTRO exercise so that banks will have more money to be able to continue buying sovereign bonds pushing yields down. So more probable than not, the outcome of the meeting will not give boost to the markets.
The Spanish government will come out with the budget for 2012. There is no mention of growth for 2012 though what is certain is that there will be a lot of austerity to bring the deficit down to 5.5% from 8.5% of GDP. Even 5.5% which will cause a lot of pain in Spain isn’t enough to be in line with the Maastricht criteria which calls for a deficit/GDP ratio of 3%. The Government is saying that there is need for cuts in the area of E35bln. Analysts are saying cuts must be even higher in the range of E64bln in order for the Spanish government to get in line and remove default fears from the market.
Whatever the Europeans do it is never enough and the problems never seem to get solved. This is why I think the best investment opportunities are in the US and emerging markets. The Fed commented on QE3 if the need arises and the market is waiting for the Chinese government to intervene with quantitative easing any day.
Talking about the BRICS – I prefer China and Russia to India, Brazil and South Africa. Of the BRICS, the country which worries me the most is Brazil. The growth rate in Brazil for 2011 was only 2.76% and is expected to come in at 3.4% in 2012. An emerging country which grows at a rate of less than 4% is considered in dangerous territory. And although the Central Bank rate is at 9.25% inflation for 2011 was at 6.63%. If I had to choose where to invest in emerging markets it would be China and Russia. Although the growth rate in Russia is lower than that of China, i.e. slightly above the 4% growth rate, Russia ran a budget surplus last year. I would choose China and Russia because the level of education in the workforce is much higher plus technological advancement is much higher than in the other emerging markets. From India, Brazil and South Africa I would invest in India because it is still growing at a rate of over 7% per annum and its current account deficit is lower than 4%.
Stock to watch: Hitachi (Price E63.92, Price Target E67.74)
Citi’s analysis: We set our target price using a SoTP approach. We allocate FY3/13E adjusted NP (with the tax rate normalized) across the divisions and set equity value by applying a fixed multiple for each business. We note that expectations for profit growth via acquisitions are high, so we add in a 5% valuation premium. Our $67.74 target price corresponds to a FY3/13E P/E of 11x (12x with the tax rate normalized).
For further information on Hitachi or other stocks we follow, contact our offices on 25688688.
Good day and happy trading!
Kristian Camenzuli
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