Market Musings 21/8/11

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.

Market Musings 11/8/11

With a grueling 20 hours of flying and two changes of plane out of the way, I’m finally back in Dublin. Given that there was a near total collapse in equity markets globally and social order in the UK while my other half and I were on honeymoon, I suspect that the moral of the story is to holiday closer to home next time!

 

So what has been going on? We’ve seen the US firstly lose its coveted AAA rating from S&P, and then go on to demonstrate that its leaders have learned nothing from other countries that have been downgraded by simply attacking the ratings agency while largely ignoring the ruinous policies that led to this ignominy. I was amused to see Tim Geithner accuse S&P of showing “terrible judgement”. This being the same Tim Geithner who as Treasury Secretary has watched the United States’ reported national debt increase from $10trn at end-fiscal ’08 to around $14.25trn today (he took over as Treasury Secretary in January 2009). Some readers may say “what about the debt ceiling deal?” in response to my use of the word “ignoring” above. I think that this word usage is perfectly fair, considering that, contrary to what some “nodding donkey” journalists would have you believe, the debt ceiling deal does little to arrest the US’ spiraling public debt. This article gives a good primer on why this is so. I highlight in particular this section:

 

An important distinction is that these cuts are not actually cuts in the budget, nor are they reductions in the deficit. The amount of government spending will, in fact, increase every year over the next ten years. Rather the cuts made in the deal are to future increases in spending.

 

Global equity markets have been in freefall as investors fret about a whole host of sovereign concerns, be it the US’ problems outlined above, Italian and Spanish funding worries and fears about France being the next country to be in the market’s cross-hairs. I do think some of the correction in the equity markets is overdone – at a time when corporate balance sheets have never been stronger, it makes no sense for funds to sell shares to buy the perceived “safety” of government bonds at a time when sovereign balance sheets have never been weaker. This is especially true when so many quality shares are trading on cheap ratings. Not that all of the money that has been pulled out of shares has gone into government bonds, mind you. Gold has continued to soar as risk averse investors flock to one asset Bernanke and Co. cannot print.

 

How does this end? Given the hysterical tone of much of the commentary out there, I wonder if we are reaching the point of capitulation in equity markets, which is when the smart money starts buying. Looking at the Irish market, data compiled by Sharewatch show that roughly a quarter of stocks have fallen by at least 20% in the past 30 days. Mike McDonough’s table shows that most of Europe’s largest share indices are officially in bear market territory, with declines of 20%+ from their recent peak. The backdrop is clearly horrible. But can it get significantly worse? I’m sympathetic to this view from Jennifer Hughes in the Financial Times:

 

Can [the market] fall further? Of course. But the market is not bottomless, if only that on a practical level fund managers cannot sit for very long on the cash they are pulling out. Looking at the sea of red, it will take guts to step in. But this is the time when reputations are made.

 

What I’m looking to add at this time are stocks with strong balance sheets and attractive dividend yields. On the latter, I was interested to read while on holiday that in the 3 months to July UK stocks paid out £19.1bn in dividends, a 27% yoy increase. Capita Research, which compiled this data, reckons that FTSE companies will pay out £66bn to investors this year, the highest level seen since 2008. One thing this pullback has given investors is a far bigger shopping list of inflation-busting dividend yield stocks to consider. This is something I’ll write about more once I’ve gotten over the jetlag! However, for now I’ll leave you with one other thing to consider. One of the things that featured on my honeymoon reading list was Joel Greenblatt’s “The Little Book That Still Beats The Market” (which I wisely concealed below a few Clive Cussler books in my suitcase while packing!) that included this line which I think is especially relevant in these troubled markets:

 

Choosing individual stocks without any idea of what you’re looking for is like running through a dynamite factory with a burning match. You may live, but you’re still an idiot.

Market Musings 12/7/11

It’s another weak day on the equity markets as sovereign debt concerns continue to cause jitters. Since I blogged yesterday, we’ve seen further symptoms emerge of the disease that Europe has failed to contain. Markets continue to tumble, while both the Spanish and Italian 10 year bond yields are at their highest level since 1997. James Mackintosh from the FT has a good video on the European mess here. Not that things are rosy elsewhere – Morgan Stanley cut its US H2 GDP forecast to 3.5% from the previous 4%.

 

(Disclaimer: I’m a shareholder in Uniq plc) Greencore issued two notable updates this morning. The first was a trading statement in which management said that it “anticipates delivering adjusted EPS in line with market expectations” for the full year. That was overshadowed by the second, in which Greencore announced a recommended £113m offer for Uniq plc, which will be part funded by an €80.2m rights issue. Not that this will come as a surprise to any of my regular readers – check out this tweet from June 30th. For background primer to this, the FT has a good article here, while I previously wrote about the logic of a Greencore-Uniq tie-up here. This is the second UK plc in my portfolio (after Chaucer) that has agreed to a takeover this year, which happily frees up even more cash for me to invest once markets settle down.

 

I was interested to see that Greencore’s rights issue is priced at a >50% discount, which compares to the <20% discount that Bank of Ireland (BKIR) had priced its one at. Earlier today BKIR was trading below its rights price, which is an ominous sign, while stockbroker Dolmen says:

 

“Due to [the bondholder] overhang plus the uncertainty over NIM and the low ROE the group will generate over  coming years we are recommending not taking up the rights. The capital can be used better elsewhere in  the market and we believe the shares will remain weak post the rights due to the bondholder overhang plus  the current uncertainty within Europe”

 

I have been calling for Ireland to step up its austerity drive for some months now. These scary charts show why time is of the essence, while this report saying that “almost half of the population is now receiving a social welfare payment” gives a clue as to where some considerable savings can be achieved.