Good morning,

Markets are called to open flat this morning. This is what's happening today:

  • A preliminary measure of Chinese manufacturing fell to 48.1 in March, the lowest level in four months, according to HSBC Holdings Plc and Markit Economics;
  • German services and factory output probably expanded this month, according to a Bloomberg survey of economists before the Markit report;
  • Japan’s unexpected trade surplus for February and higher-than-forecast exports added to evidence of a rebound in the world’s third- biggest economy;
  • Elections next month in France and Greece;
  • Brent is trading at $123.59.Oil fell as much as 0.7% after France said that industrialized nations are considering releasing strategic crude stockpiles to counter rising prices. Crude prices have advanced this year on concern sanctions aimed at halting Iran’s nuclear program will disrupt oil exports;
  • Apple closed the session at $603.76 after having hit a high of $609.65

The economy is improving in Japan after the Tsunami in March of last year and economic data is proving this fact. Japan reported and unexpected trade surplus for February and higher than forecasted exports. The Yen has weakened 7% against the dollar since Feb. 14 when the Bank of Japan expanded monetary stimulus. The weakening Yen is helping the economy get back on its feet. The Nikkei is the best performing market since the start of the year. Alot of people get cold feet when they think of investing in Japan because the economy has been considered a dead bird for a long time. But things are changing and whereas in the past the Yen would rise even when the Japanese needed it to weaken so they could export more goods, the Yen is finally weakening and foreigners are investing in Japan. The country is expected to report a growth figure of close to 2% for 2012 which is much better than the growth figures we are seeing in other countries around the world. A good exposure to Japan would be to hold iShares MSCI Japan Index Fund (EWJ US EQUITY).

The question every investor is asking is 'what next?' The DAX is up 20% for the year, the Nasdaq is up 18%, the Nikkei is up 20%. Where are the markets going from here? There are two main contributors to maintaining this rally. An improvement is economic data plus an improvement in margins. Next month is earning season and what investors want to see companies maintain their high margins and economies to show consistent growth. Investors are worried that the American economy isn't growing at the rate economists are expecting it to grow and that margins will come in lower than Q411.

It is highly probable that we will see a slowdown in margins though this does not mean we will see a reversal in the stock market. It is true the NASDAQ, DAX and Nikkei are up 20% for the year though even with this rally, stocks are still undervalued. It is true that Q112 might not be as good as Q411 however, analysts have taken into account a slowdown in global growth and expectations reflect the current scenario. When a company reports results and margins are not as high as they were in the last quarter doesn't automatically mean that the markets will fall. If margins continue to remain healthy despite the global slowdown in growth and the outlook remains bright, the shares should continue to maintain their gains. When a company beats the streets forecasts, the forecasts would be factoring in what economics think of the economy. So it doesn't mean a slowdown in profits automatically means a drop of 10% in the markets. If earnings slow down though still beat the street estimates, I am convinced the markets will hold on to their gains.

Now the next question an investor would ask is 'Should I be long or short the market?' This is what I think. Before the earning season I think you should be exposed to technology stocks and industrials. When I talk about industrials I mean the likes of Bombardier, Brenntag, Caterpillar, Deere & Co, GE etc. And when I talk of technology stocks I mean the likes of Apple, Microsoft, Intel, Oracle etc. My opinion is that we will see an improvement in margins when it comes to technology stocks despite the slowdown in global growth. On the other hand, industrials are more defensive though the rally since the start of the year was mainly caused by technology and financials. Industrials lagged in the rally and I think on current valuations, there is upside to this sector.

I would wait on the side-lines when it comes to financials, cyclicals and utilities. Financials had a good run since the start of the year. Although the ECB injected $1trn in the banking system, growth is very weak in Europe and this money isn't being lent out to corporates. The housing market isn't back on its feet so it might be wise to wait and see what happens before adding on to positions in financials. Cyclicals also rallied hard since the start of the year. Again if growth is reported to come in worse than expected, they will be the first to get hit so I'd be hesitant to add on to positions just yet. And the last industry I'd not add on to at this point are utility stocks. Utility companies although being defensive are highly indebted. If the economy starts to improve and rates start to rise earlier than expected, the cost of debt will increase and because they are highly geared, it will have an impact on their profitability. On the other hand if the economy is slowing down more than expected, the demand for their services will decrease and this will also have a negative impact on their bottom line.

My conclusion is as follows. I still think it is wise to be in the markets at this point in time. Though I believe that to continue beating the market going forward it will all boil down to stock picking. We could see a breather in financials till results start to come out though I believe that technology and industrials should do well. Alot of companies have alot of cash and their future looks bright. Yesterday Goldman Sachs came out with a 40 page report saying why investors should sell sovereign bonds and buy equities. As people shift asset class, the demand for equities will increase as yields go higher. Don't forget that despite the rally we have seen in the markets, we are only trading on a PER of c13x compared to the long term average of 17x.

Stocks to watch: WPP Group (Price 854.50p, Price Target 970p)

WPP is a globally diversified agency holding company that offers exposure to the structural shift in advertising budgets from traditional to non-traditional formats, and the development of faster-growth geographic markets (Asia, Central & Eastern Europe, Latin America). Earnings growth is additionally enhanced by margin expansion and selective acquisitions. We regard WPP as a balanced way of playing eventual advertising recovery, with flexible staff costs supporting margin upside, and underpinning above-sector-average EPS growth. We rate the shares a Buy.

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

Good day and happy trading!

Kristian Camenzuli