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Good morning,
Markets are called higher this morning, this is what's happening today:
When the IMF called for the EU to increase its firepower or else they won't be getting further help, Merkel came out saying that the EU doesn't need to increase its funds and it has enough liquidity. Merkel is now going back on her words and probably on Mar. 30, we will hear that the EU leaders are now going to allow the EFSF and ESM to work concurrently.
Euro-area leaders have established two bailout funds, the temporary European Financial Stability Facility and the permanent E500b European Stability Mechanism, which is scheduled to begin operations this year. Under current rules, unused EFSF funds would be passed on to the ESM, though disbursement could not exceed the half-trillion limit. Policy makers are discussing how to add to the funds, for example by allowing the EFSF and ESM to work concurrently to make more money available.
Political instability is here to stay. Though what's interesting to note is that the amount of money going into equity funds is increasing. There is a general consensus in the market that equities are undervalued and government bonds overvalued and data is showing that investors are switching out of government bonds and into equities. We are seeing the 10-year US treasury yield come up over 2.3% from below 2% a few days ago. On the other hand there are alot of cash rich companies with improving margins and trading on low multiples which offer greater value in this market.
Alot of countries which were less interesting to look at in the past are now becoming great investment opportunities. I am referring to Indonesia and Japan. Indonesia was the worst hit country in the Asia crisis during the mid 90s. Nobody wanted to hear about Indonesia. However the tables turned and Indonesia is now a model country for many emerging countries. Indonesia has a negligible budget deficit, a trade surplus, a very small debt/GDP ratio and foreign reserves over US$100bln.
As for Japan, the country is moving out of a depression which it traded in for the last 2 decades. When the bubble in Japan burst, stocks were trading on PE ratio of c80x and the ROE was lower than it is in the markets today. Today we are seeing a weakening Yen which is increasing exports and strengthening the economy. On the other hand we are also seeing foreign direct investment into Japan and analysts have increased the growth forecasts for the year. Whereas at the beginning of the year analysts were expecting growth to come in flat for 2012, now analysts are predicting that the growth rate will come in over 2%. Most Japanese stocks trade on a PB ratio of less than 1x.
Regarding China, I still believe it's only a matter of time before the Chinese government carries out expansionary monetary policy, boosting growth prospects for 2012. With pension funds now adopting a similar strategy to investing like US pension funds, the demand for Chinese equities should increase boosting demand and driving prices up closer towards their intrinsic value.
Although there is talk that the firewall will increase in Europe I still don't think it is time to be exposed to European stocks. The firewall is there to protect contagion from spreading and not to stimulate growth. Even the LTRO exercise which resulted in E1trn being injected in the banking system is not a mechanism which is generating growth. Around E800bln of the E1trn are parked at the ECB.
From what yields are telling us, it is an if not when Portugal will need a bailout package. Rates above 7% become unsustainable and the 10-year is yielding 13% whereas the 2-year 6%. If you aren't exposed to banks of to Portugal, I wouldn't lose too much sleep over it because we are talking about a E40bln economy.
Spain is starting to be back in the news. The problem with Spain is that it has a high budget deficit and debt/GDP. On the other hand it is finding it very hard to raise funds because it has an unemployment rate of c25% and there isn't expected to be any growth for the year. No growth means a very low probability that the unemployment rate will decrease and government spending will remain above government revenue.
Below is the value of bonds still to mature for the PIIGS in 2012:
I think Spain and Portugal are the reasons why Merkel wants to increase the firepower of the bailout funds. An increase in the firepower is a greater reason to move your investments ideas out of Europe into US and emerging market names and not a time to be injecting more money into European equities.
Stock to watch: Easyjet (Price 462.98p, Citi's Price Target 500p)
EasyJet Plc will grow faster than the European air transport market, Chief Executive Officer Carolyn McCall told Frankfurter Allgemeine Sonntagszeitung. EasyJet’s growth will come “with a profit,” the newspaper quoted McCall as saying. “We are looking now for profitable growth and don’t only want to gain market share.” The European air transport market will be hampered by high oil prices, McCall said according to the newspaper.
For further information on Easyjet or other stocks we follow, contact our offices on 25688688.
Good day and happy trading!
Kristian Camenzuli
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