The market has been trading in line with our recent strategic and tactical expectations, showing consolidation and correction after an impressive rally in the first quarter. The US market has declined by just 4% from its recent high, whilst the European market has lost closer to 13% as concerns about economic growth and debt continue. There are many parallels to 2011, leaving open questions as to whether this correction might evolve into something more serious. On that point, the jury is certainly out. We have a positive rating on equities globally; not least, if the situation continues to deteriorate, we believe central banks will act to support markets. We expect a volatile year, but we expect markets to rise from these levels by year end. This is not to say that we are blind to the risks, we do see a real threat to the Euro Area. This is especially true as the market appears to be challenging the idea of austerity in recession on such a broad scale. Risk-averse investors will need to be careful about what they buy and when. But, we would remind that not all is negative. The US, for its part continues to present healthy growth, and we believe the trend will continue. Emerging markets are doing well economically, meaning that developed-world risks are weighing on their share prices, and those risks are centred in Europe. But, here too the risks are not one-sided. Spain is not Greece, it has nothing like the debt load on government books. Debt in the private sector is easier to manage through market pricing. In a negative scenario, there will be excellent opportunities for M&A in the Spanish market. Additionally, Spain now has a government intent on restoring credibility and growth. Many changes have already been made, and we are now in the lag between the changes being introduced and their impact showing up in the economic statistics. If the markets can?t wait for that to happen, the central bank will step in. The situation continues in line with our understanding from last year. The EU is using market mechanisms to force difficult changes in national economies. It is a slow and painful process, but it is proceeding. Investors suffer through volatility, and even more through negative real interest rates, underlining the importance of maintaining some risk exposure. We believe the global growth cycle is in place, and we plan to use the current correction to buy risky assets, particularly globally oriented businesses and companies with stable dividends. Meanwhile, if you are concerned about a repeat of 2011, we recommend you pursue strategies that benefit from a strengthening dollar.
Sorry for the hiatus, vacations!
The market has been trading in line with our expectations, and consolidation has turned into something of a correction on lower-than-expected employment data from the US.
In the short-term, the selling might continue, especially as Spain concerns play into the equation too. However, I stop short of seeing a full-scale correction here. The US market should be supported by either better data (as I believe the recovery is intact) or renewed expectations of support from the FOMC. Both are realistic probabilities.
As for Spain, it remains a concern. However the issue is less solvency, rather market worries about Europe’s policy for dealing with the crisis (I have previously noted that austerity during a recession is a risky prospect). The reality is that Spain’s government debt load is nothing like so high as that of Greece (circa 80% at this time). The bulk of Spain’s debt lies in the private sector, including among corporates. This debt can be more easily managed by the market. That in the financial sector (regional savings banks) is being managed by the ECB.
On the plus side, Spain has achieved many reforms already, and is in the lag between implementation and demonstrating improvement. Furthermore, the nation is really not in such a catastrophic condition: For example, house prices in Valencia have continued to rise throughout the crisis.
However, for clients fearing a return of the European crisis, I recommend a short euro position. If Spain becomes a systemic issue, then the dollar will certainly rally against the euro, this risk can be profited from through FX options or structured products.
I am also looking at international currency bond portfolios, for those worried about the future of both the euro and the dollar. This portfolio might also be interesting for clients who are concerned that the gold sell-off will continue (assuming that gold was purchased as an alternative to euro and dollar exposure).
On the markets this week, there is little expected by way of major economic data (European Industrial Production, Thurs; US CPI Fri). On the EM side, there is China GDP due out on Friday, along with Brazilian Retail Sales. Indian Industrial Production is on Thurs.
Also, we start the US Earnings Season with numbers from Alcoa and JPMorgan. Consensus is still rather high for earnings, with strategists looking for 1Q12 S&P 500 earnings 21% up year-on-year. Whilst this may be optimistic, it seems early for a definitive sell-off and as noted, the Federal Reserve is now very actively managing market expectations about further easing. It will likely move fast in the face of a significant market break down. With this in mind, I continue to look at buying quality conviction stocks as the market weakens.