Good morning,

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

  • Asian stocks slid the most in a week and oil fell as reports showed corporate earnings are worsening in China and Federal Reserve Chairman Ben S. Bernanke said U.S. unemployment remains too high;
  • Societe Generale SA cut its earnings growth forecast for the Hang Seng China Enterprises Index this year to 0 from 5%;
  • The recovery in the U.S. economy isn’t assured and policy makers don’t rule out taking further steps to boost growth, Bernanke told ABC News yesterday;
  • Data later today may show U.S. factories received more orders for durable goods in February;
  • Japanese stocks fell today after the Nikkei 225 yesterday erased losses since the country’s record earthquake. A 7.2% drop in the yen and $241 billion of reconstruction spending have pushed the index up 20% this year, the second-best performance among major benchmark indexes in the developed world;
  • Brent is trading at $124.96/barrel;
  • 10-year Italian yields are at 5.119%, 10-year Spanish yields are at 5.349% and 10-year Portuguese yields are at 11.454%

Markets are taking a breather as they wait to see the data that is going to come out from Q112 regarding both the economies and individual companies. Investors want to know whether margins will be maintained and if growth prospects are still in the cards before the rally continues. In my opinion for all those who are not in the market, a period of weakness is a good time to start picking up stock. You shouldn't take a short term but rather a longer term view when dealing in equities. Myopic loss aversion occurs when an investor focuses on the short term performance of a share without looking at the bigger picture. And it is this bigger picture than we should be looking at. Although the markets are up 20% year-to-date they are still undervalued compared to its long term average. The average PE ratio of the global markets since 1970s is around 17x. We are currently trading around the 13x level.

So even if growth comes in slower than expected, equities are not overpriced just because the DAX is up 20% this year. Expect low growth from Europe. Europe is expected to go into recession this year. This is no surprise and we knew this all along when the markets were rallying at the start of the year. But despite the negativity coming out of Europe, there is alot happening in other parts of the world.

Indonesia, China, Japan are amongst the economies that are performing well in this European crisis. Ok China is expected to grow at 7.5% this year instead of 9.5% last year but so what?! Had China continued to grow at 9.5% the government would have had to intervene and bring down the growth rate by using restrictive tools. China cannot keep on growing at 9.5% irrespective of the European crisis because a high growth rate brings about with it high inflation. We are already seeing wage inflation in China and some American companies bringing production back to the US because it doesn't pay them anymore to produce their products in a country where the cost advantage is being reduced.

So you might ask 'But if China's growth rate is going down because of lower exports and lower production why invest in it?' The beautiful thing about China is that its Government has ample tools it can use to boost growth in the economy. The Bank of China rate is at 6.5% compares to the 25 basis points in the US and 100 basis points in Europe. China has a debt/GDP ratio of only 16% and a budget deficit/GDP of only 2%. It can stimulate growth internally and make up from the lack of demand from the rest of the world.

When there are problems in the Eurozone it doesn't mean that there aren't opportunities anywhere else. Don't get lost in monitoring financials. Financials have had a good run since the start of the year though now they will start losing steam until they start lending money back to corporates and though the circulation of money in the economy, growth will be generated.

Look elsewhere. Look at technology stocks with large cash piles, improving margins and growth prospects despite the state of the global economy. Look at Apple, Microsoft, IBM, Priceline. The list is endless despite the current negativity.

You can still make money in these markets. You just have to be wise enough and know when to cash in on your profits and shift sector. So far technology and financials were the best performers. I think financials will lose its steam in this rally though the rally for tech stocks will continue. I suggest you turn your focus to industrials, consumer non-cyclicals, utilities which didn't run as much as financials in the first quarter of this year though should start picking up in Q2.

Stock to watch: Atlantia (Price E12.56, Price Target E16.15)

Recent deals announced in 2011 and early 2012 are making more attractive Atlantia's assets portfolio. We think diversification with a wider geographical footprint and exposure to "safe" emerging markets is a positive. In our view, the company is undertaken a smart rotation of assets selling non-core Italian assets and increasing the exposure to Latin American assets. These deals could move Atlantia from an EBITDA almost entirely related to Italy in 2010 to have a 27% exposure to emerging markets in 2015. We think the shares are undervalued: 1. In our view the market has broadly "ignored" the new business mix. 2. The Atlantia shares suffered significantly the sovereign debt crisis mid 2011. However, although the Italian 10 years bond is essentially "back to normal", the shares have recovered just a small part of the lost ground. We maintain Buy.

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

Good day and happy trading!

Kristian Camenzuli