EUROPEAN EQUITIES OUTLOOK 2011

EUROPEAN EQUITIES OULOOK 2011

I assert that european economic fundamentals remain supportive such as industrial orders, consumer confidence stabilize and unemployment growth despite eurozone soverign debt crisis. In addition, the weaker euro will have contributed to strength of the macro data in euro zone with export oriented businesses benefiting from the currency depreciation. I firmly believe EU commission is likely to take increasing control over member states public finances which is good for euro area in the long term. The solution ultimately require the euro area to absorb onto its own balance sheet many of the liabilities of its weaker members. I also urged EU commission restructure, cut costs and stablizing the future debt to GDP obligations. I feel european companies are in strong position because of disciplined cost cutting and efficiency management during the crisis and delivering strong earnings growth. I worries only inflation have been concentrated in companies that are exposed to rising commodity prices. Investors look to avoid these companies instead on companies with pricing power due to unique intellectual property, high gross margins and strong brand equity. Finally, I remain constructive on the outlook for european equities in the near term because favourable monetary conditions, the economic growth momentum and last but not least the valuations are  still attractive relative to the history.            

UK EQUITIES VALUATIONS NOT STRETCHED BUT...

UK EQUITIES VALUATIONS NOT STRETCHED BUT…

The outlook for the UK economy is not bright but the outlook for the UK equities could be bright despite public spending cut because improved corporate earnings and attractive valuations point to low but positive returns over the next twelve months accompanied by greater volatility. The “V “shaped recovery becoming “U” shaped as the impact of stimulus measures fade. But I think the economic recovery will continue albeit slowly and uncertainty over the strength of the recovery will keep UK equity markets volatile. UK commercial property still in a low rate environment and returns will be capped by a lack of lending to this sector. But I still positive about the outlook for UK equities in spite of the risks to the UK macroeconomic environment because more than 70 percent of FTSE 100 revenues are generated overseas so the index remains resilient to the any renewed downturn in the domestic economic outlook. I believe that indices that are set to deliver earnings growth of around between 15 to 20 percent over the next twelve months. I would view these forecasts are achievable. So it could create opportunities for long term investors.  

I favor some of the following stocks.

Amec                               -        1045.00 p

BAT                                 -        2461.00 p

National Grid                     -        582.00 p

Reckitt Benckiser                -        3416.00 p

Renishaw                          -        1212.00 p

An investment that has strong fundamental can never go wrong.

GERMANY EQUITIES OUTLOOK IN OCTOBER 2010

GERMANY EQUITIES OUTLOOK IN OCTOBER 2010

 

I consider German equities to be attractive. Germany economic outlook has been enhanced due to strong recovery of exports, pick up in investments, and resilient labor market. Germany continues to be one of the world’s strongest net international investment positions at 38% of GDP in 2009. Germany has expressed its commitment to reversing its fiscal imbalances through the government’s four year consolidation programme aimed at reducing the budget deficit to below 3% by 2013. In addition to that growth forecasts for corporate earnings in Germany are significantly higher due to the weak euro and cost cutting undertaken during the recession. A weak euro is good news for many exporters operating in Europe. It makes them more competitive on the world stage and also increases the value of their overseas earnings. On a short term view the positive economic and company outlook create confidence and give boost to the markets. Meanwhile the market is approximately 30 percent lower today than it was at the earnings peak. As a result valuations are looking attractive. I believe that DAX based on 12 months forward earnings was 10.7. This compares with 20 year median of 15.8. I favor some of the following stocks   

Linde                                -        97.52 EUR

Bilfinger Berger                  -        53.75  EUR

Hugo Boss                         -        44.10  EUR

Hochtief                            -        63.62  EUR

Continental                        -        57.02  EUR

Volkswagen                       -        81.08  EUR

SWISS EQUITIES OUTLOOK IN OCTOBER 2010

SWISS EQUITIES OUTLOOK IN OCTOBER 2010

Swiss economy expanded 0.9 % in Q2 2010. Switzerland growth forecast for 2010 has been raised from 1.8 % to 2.7%. I anticipate that swiss economy marked slow down due to strong appreciation of swiss franc and the declining momentum of the global economy. The export of goods in the second quarter had significantly slower momentum than in first quarter due to slowing growth internationally coupled with appreciation of swiss franc. In addition to that business expectations among industrial companies particularly among companies with a strong export focus declined slightly but economic indicators for the domestic economy especially consumer sentiment remain positive. The swiss business environment is likely to remain choppy. The decline in investment yield will be key challenge for the industry.  I believe that there is no sudden economic collapse in the second half of the year but rather a gradual slow down.

SNB statement sound increasingly cautious that the possibility of deflation at the beginning of 2011. It maintains its expansionary monetary policy due to lower risk of inflation. It is leaving the target range for three months LIBOR unchanged at 0.00-0.75% and intends to keep the LIBOR within the lower part of the target range at 0.25%    

Let me conclude that modest growth should continue in the coming months but stock prices are unlikely to rise at the pace they have achieved in the last nine months. So equity valuations could come under significant pressure if growth disappoints or interest rate rise more than expected pointing to the risk of sudden correction in the equity market. As of now, valuations are favorable because of most of the indicators are still below the historical average. Swiss market does not appear to be materially overvalued compare to US. I put neutral in swiss equities.

My favorite stocks are:

Novartis                           55.70 CHF  

Richemont                         46.14 CHF  

Swatch                            359.80 CHF  

Swisscom                         397.00 CHF  

Syngenta                          246.80 CHF

An investment in knowledge always pays the good return in the future.  

Global Market Outlook

GLOBAL MARKET OUTLOOK

Indeed, there has been great pick up in global activity during this fiscal compare to previous year. IMF, OECD and ECB corroborate view that global GDP will grow by 2.8% at market exchange rates.  It is clear that market is facing a multi speed recovery. The global economic outlook being driven by more rapid rebound in emerging economies and accommodative macro economic policies such as fiscal stimulus, and an expansionary monetary policy and some extraordinary measures adopted to restore the functioning of the banking system. However these factors are temporary phenomena. Fiscal stimulus in US will impact soon in the face of sharp increase in government indebtedness. Central banks are beginning to tighten monetary policy by withdrawing the liquidity measures that had been injected in the market. However, the scope for the private sectors in developed economies to step in and replace the public demand is still limited while household and financial sector balance sheets are remain weak. So it will continue as long as credit growth remains sluggish and labor markets remain weak. As a result the recovery is likely to be a slow process in developed economies. But in emerging economies, demand has been increased during this fiscal but will it sustain? It is a million dollar question.      

It is my belief that rebalancing the global economy is critical for sustaining growth in the short term. But the health of the global financial system has improved since 2010. However, risks remain elevated due to the ongoing repair of the household and financial sector balance sheets.

Here is my bottom-line that the valuations in the public equity markets somehow overpriced and above its historical average. However, the outlook in the very short term is still uncertain and the future trend of the market may bearish.

Om Ganesh

Om Ganesh