Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 4/9/11

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Since my last update, we’ve seen deteriorating economic indicators, corporate bunfights and my wedding in Dublin’s historic Pepper Canister church!


It’s probably right to save the best for last, so let’s kick off with the latest macro developments. European PMI data show a continued deterioration in manufacturing activity more or less across the board. August’s reading of 49.7 for the Eurozone shows ongoing industry contraction. The net result of this is that the narrative of a weaker European economic outlook continues, so as I’ve said before this will likely translate into ECB interest rate reductions and downgrades to consensus earnings estimates for European equities. Not that I’m unduly worried about this, given that, as I’ve argued before, I believe that this downside is already priced in. Across the pond the US released grim non-farm payrolls data. There are some great charts here that highlight the weak US labour force situation. Given the poor employment backdrop, President Obama will find it very hard to secure a second term.


(Disclaimer: I am a shareholder in Independent News & Media plc) Turning to the media sector, The Irish Times has unveiled a new round of cost cutting measures. Given INM’s recent comments about the advertising outlook, it will be interesting to see if this proves to be the final round of restructuring at ‘The Old Lady of D’Olier Street‘ in the current cycle. Whatever about the difficulties being experienced by national newspapers with big circulations, how bad must the situation be for many of these papers? Speaking of INM, tensions with its biggest shareholder Denis O’Brien have escalated in recent days. While relations between INM and O’Brien have been strained for some time, this latest development might again put boardroom tussles to the front of investors’ minds when looking at INM instead of the potential upside that will come from deleveraging. Hence, a resolution of this would be in everyone’s interests.


Returning to something I mentioned above about how equity markets have, in my view, priced in a lot of the downside, I was struck by a good article by David Oakley in the weekend FT. He rounds up the views of various equity strategists, and two points stand out. Firstly, he cites research by UBS that show net debt/equity ratios for stocks in the DJ Stoxx 600 index (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 sheets in the west. This also highlights the capacity that companies have for further M&A, share buybacks and capex. Secondly, on valuations, HSBC notes that the FTSE 100 is trading on a forward PE of 8.6x, compared with its 25 year average of 14x. Earnings estimates are clearly too high, but even if you adjust the PE ratio to compensate for this, you still get a benign multiple.


The new issue of Business & Finance magazine is out now and I’d encourage my Irish readers to go out and buy it. There are some great articles by the likes of John Walsh, Karl Whelan and Cormac Lucey. I’ve got two pieces in it – on whether it’s time to step back into the equity market, and the options for Irish investors looking to diversify.


(Disclaimer: I am a shareholder in Irish Continental Group plc) Given how important exports are to an Irish economic recovery, just how insane is it that the profitable State-owned Dublin Port is looking to increase rents by up to 60%?


John McElligott has a characteristically excellent analysis of Grafton Group here. I concur with his view that, while it’s an excellent company, it’s too early to buy it.


Finally, a note of thanks to my readers and Twitter followers for their good wishes for my wedding. The best precious metal investments I’ve made to date are now sitting on mine and my wife’s fingers!


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