Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 21/8/11

with 4 comments

Activity on the blog has been quiet this week as I had to finish two articles for the new issue of Business & Finance magazine, in which I look at the outlook for global markets and also talk to two of Ireland’s brokers, NCB and Dolmen, about the options they have for investors looking to diversify out of Ireland and the eurozone. Sadly, this meant that this blog remained quiet while the markets were anything but that!


There was panic on the global equity markets as investors rotated out of shares and into “safe haven” assets such as gold, which continues to shoot higher. At the time of writing it is just under $1,852 an ounce, having surged 14% in the past 30 days (it’s up 47% in the past year). Another “safe haven” that has seen massive inflows is government bonds, and we’ve seen some chunky moves here, with yields on US Treasuries at levels last seen when Eisenhower was in the White House.


While there is no denying that the catalyst for the slide in equity markets – fears of a ‘double-dip’ recession and deleveraging slowing the pace of a future recovery – is real, the market reaction to me looks excessive. Concerns have been heightened by weak GDP readings across many of the world’s leading economies, however, low growth and high debt are hardly new concerns, and I believe that markets have more than moved to compensate for a more adverse scenario playing out. Moreover, given the hysterical tone of much of the financial commentary I’ve recently read, my view is that we are in and around the point of maximum bearishness (recall, however, the old stock market adage that nobody rings a bell at the top and bottom of the market!), and that shares will rebound significantly between now and the end of 2011.


While there’s no denying that the economic outlook is gloomy, things are nowhere near as bad as they were in 2008 (comparisons with 2008 have been repeatedly made this week) and it shouldn’t be forgotten that corporate balance sheets have dramatically improved since the onset of the global financial crisis (one article I read this week said that US and European corporates are sitting on $3trn in cash). Furthermore, with government bond yields at record lows and sovereign balance sheets in rag order, minuscule returns on cash and gold looking frothy (in the short-term, as it has spiked well above trend, however, the long-term fundamentals remain intact), I would submit that bluechips with strong balance sheets and well-covered dividends (dividend yields for many large corporations stand at a multiple of their countries’ bond yields) are looking particularly attractive here to people with money to invest. 


It takes guts to step in when panic like this sets in. Perhaps the market has further to fall. But when sentiment turns, and the huge sums of cash that have been parked at near-zero returns in the money markets in recent weeks rotate back towards riskier assets, the rebound in equity markets (I can’t see the funds rotating into government bonds or precious metals, given where they are trading at) will be an extremely violent one.


Turning away from the overall market and to specific companies, I was amused to see stockbroker Peel Hunt use the recent UK riots as one of the reasons why it recommends Domino’s Pizza UK & Ireland plc to investors as a buy:


“We would also take seriously recent social developments, which even after calm has been restored, may result in a subtle shift between the considerations for going out as opposed to staying at home. This cannot be bad for the delivery business”


I was pleased to see solid interim results from Kerry Group during the week. Growth was led by its world-class Ingredients division. The company  “remains confident of achieving its growth targets for the full year and delivering 8-12% growth in adjusted EPS” as previously guided.


I recently commented about how there has been a spike in share buybacks. On Thursday Ryanair disclosed that it has bought back a further 1% of its shares. I wonder if any other Irish plcs will follow the lead set by it, Abbey and United Drug given the recent market falls.


Finally, looking to the week ahead, the main scheduled Irish corporate news will be the interim results from Kingspan (Monday), Tullow and Glanbia (both Wednesday) and Independent News & Media (Friday). Doubtless they will provide plenty of talking points.


4 Responses

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  1. […] was a steep drop in the gold price yesterday. I had recently noted that the price was “looking frothy“, so this pullback isn’t a huge surprise. Recently I wrote of how I foresaw further […]

  2. […] been due to month-end activity by the buy side, but fundamentally the market was oversold and, as I wrote some days ago, a ‘violent’ rebound was […]

  3. […] (Europe’s 600 biggest listed plcs) has fallen from 61% in 2008 to 39% now. This is something I’ve written about before – corporate balance sheets are in very good health compared to sovereign government balance […]

  4. […] territory and that the US is in for a period of stagflation. I would concur with that – see this blog post of mine from late August in which I warned that bonds were overvalued and argued that equities were too […]

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