Time to swim against the tide and dip into Europe again

For investors as well as journalists, where the funds are actually flowing tells a tale, even if it is more often than not a contrarian one. Investing in the places no-one else wants to go is psychologically hard but frequently profitable.

The fund flow data so far this year confirm a marked shift in investor sentiment. A net $16bn (£10bn) – inflows minus outflows – has returned to the world's stock markets, reversing about 9pc of last year's outflows, according to Citi figures.

More interesting is where the money is heading. It has been pouring into emerging markets and out of developed markets, with the exodus from the mature markets accelerating in the past couple of weeks. In total, emerging markets have attracted $24bn, offsetting about half of last year's redemptions, while developed markets have seen $8bn taken off the table. In particular, investors have been least interested in European and Japanese equities as their appetite for the developing regions of the world has returned.

It is probably not too surprising that these are the two markets to have been left out in the cold. Japan has been a disappointment while making the case for Europe has been mission impossible since the Greek crisis flared up two years ago. It is a statement of the blindingly obvious that Europe continues to face some pretty intractable problems. But investment is less about spotting where things are going right or wrong than about noticing where the perception of those trends is at odds with the reality. However bad things are, investors can profit if the market thinks they are worse than they turn out to be.

That is the gist of the argument for investing in Europe today, or as Credit Suisse put it this week: "Europe – lots of problems but raise to benchmark". It is the first time the bank has been anything but negative on the region in two years.

Here are some of the problems for investors in Europe. First, growth is anaemic and, with wages in the peripheral countries needing to fall by as much as 13pc to restore the periphery's competitiveness, it is likely to continue to stagnate. Second, the process of paying down debts has barely begun – another reason to expect weak growth. Third, several governments outside the core look insolvent. Fourth, the euro remains grossly overvalued, which in turn crimps growth.

Against this backdrop, it is unsurprising that investors have shunned the region. Even less surprising when you consider the inability of the eurozone's political leaders to convey any sense that they either understand the scale of the challenge or can find a solution. So why might Europe, nevertheless, be worth a look now? First, because the risk of a disorderly break-up of the eurozone now looks lower than a few months ago. ECB President Mario Draghi's injection of long-term liquidity for the region's banks has made a Lehman-type credit crunch possible rather than probable.

Second, because manufacturing new orders are picking up and earnings forecast revisions are second only to those in the emerging markets and better than in the US, UK and Japan. When European earnings revisions have turned before, the region's shares have tended to outperform over the next three to six months.

Third, because European companies have a significant exposure to the faster-growing markets in the rest of the world. Many of the large, multi-national businesses that dominate most European investment funds are tied to the fortunes of the global economy and not just the eurozone area. Just over half of continental European earnings come from outside the region.

Finally, and most importantly, valuations are attractive on a historical basis. Dividend yields, in particular, are in many cases approaching 5pc, which is around 50pc higher than the average in Europe in recent decades and more than twice the yield on German government bonds. Compared to the rest of the world, the valuation of European shares has not been this attractive for around 16 years.

If successful investing was about following the herd and doing what felt easiest, we would all be good at it. Unfortunately, the rewards accrue to those who swim against the tide and invest when it feels most uncomfortable. Perhaps this is just such a moment in Europe. "Don't follow the money," as Deep Throat didn't say.

View the original article here

Spain grits teeth yet again as austerity deepens

The conservative leader pledged to fight Spain's unemployment curse by shaking up the labour markets. The jobless rate has hit 22.8pc with 5.4m people out of work. The tally is certain to rise further as the economy falls back into recession.

Spain's 10-year bond yields dropped to 5.09pc, far below the 6.5pc stress peak seen last month, even though Mr Rajoy said the government will miss its budget deficit target of 6pc of GDP this year.

Global funds are gobbling up Spanish and Italian debt on bets that lenders will exploit the European Central Bank's offer of three-year credit at 1pc to buy sovereign debt, playing the "carry trade" on the yield spread.

Mr Rajoy evoked the triumph of the mid-1990s when Spain clawed its way back to viability and astonished EU officials by meeting EMU entry terms. But the path was smoothed by a peseta devaluation of 45pc over the preceeding three years.

It may prove harder this time within the euro straight-jacket. "The global economy was much stronger then and they benefitted from devaluation," said Dario Perkins from Lombard Street Research.

"Europe is repeating the same disastrous policy tried in Greece. They have not learned the lesson and it is hard to see how the outcome can be much better in Spain. The banking debts have been hidden and we don't yet know how much this will cost the government."

Mr Rajoy warned of further bank rescues as lenders struggle with €176bn in "troubled" assets. "A second wave of restructuring is inevitable," he said.

The fiscal cuts for 2012 will amount to 1.6pc of GDP, though details are scant. It follows earlier cuts of 1pc in May. Early retirement has been ended. Even saints days have been culled, shifting the holiday to Mondays to end the "bridge" of long weekends.

The package came as Standard & Poor's downgraded the region of Valencia to BBB- after it covered just 59pc of a bond issue. The agency said Valencia has "no clear access" to the capital markets. There is little risk of default on €1.6bn of maturing debt on Thursday, but S&P said the Junta is being kept afloat by money from Madrid.

Days earlier Fitch Ratings issued a downgrade warning for Spain and a clutch of EMU states and warned that a comprehensive solution to Europe's debt crisis may be "technically and politically beyond reach".

The agency said: "Of particular concern is the absence of a credible financial backstop. This requires more active and explicit commitment from the European Central Bank to mitigate the risk of self-fulfilling liquidity crises for potentially illiquid but solvent euro area member states."

The Bank of Spain said bad loans had reached a 17-year high of 7.4pc in October as the damge continues to filter through from the housing crash. The Madrid property consultants RR de Acuna predicts that prices will have to fall another 20pc before the market clears an overhang of one million homes.

View the original article here

Tom Stevenson: Income, not growth, is once again the main driver of returns

I looked for companies, usually small ones, with the potential to increase their earnings quickly and recommended buying them if that growth was not already "in the price".

It was a fairly mechanical process, which involved comparing the valuation of a company's shares with its profits growth to arrive at a measure we called the PEG, standing for Price Earnings Growth. Basically, a low PEG was good, achieved via high growth or a low valuation or a combination of the two.

You don't read much about PEGs these days for the simple reason that while cheap valuations are 10 a penny, high growth is a great deal scarcer.

The growth that we had got used to during the 1980s and 1990s was – to a larger degree than we thought at the time – a product of progressively cheaper money, consequently rising house prices and ever-increasing debt. That world has disappeared and with it, for the time being, the environment in which anyone would think seriously about launching a publication such as Investing for Growth.

The world investors find themselves in today is very different, at least in the developed world. A low-growth environment in which rapidly rising earnings are the exception. It is a world that investors before the 1980s would easily recognise, one in which income, not growth, is the principal driver of returns.

When investors come to expect double-digit capital gains each year, it is unsurprising that they are uninterested in the extra few percentage points of return chipped in by a company's dividend. It's nice to have, no more. But those kinds of super-charged returns have in recent years been rapidly wiped out by similar-sized falls so that the net gain after a so-called "lost decade" has been negligible.

Over very long periods, almost all the gains from investing in the stock market can be attributed to the reinvestment of dividends. We forgot this in the Investing for Growth years.

Something else we forgot during the low volatility years of what has been called the Great Moderation is that dividend income is a great deal more stable and predictable than economic growth, company profits and so share prices. Company bosses will do almost anything to avoid cutting their dividend because they tend to pay for it with their jobs.

Another thing we are going to have to get used to in our low growth but volatile world is persistently low interest rates. This environment of paltry returns from both cash and government bonds is another reason why investors are going to become increasingly attracted to companies able to offer a high and sustainable income.

For as long as inflation is still a problem, equity income also provides one of the few ways of generating a real return in excess of the cost of living.

The generation of that high and sustainable income is furthermore an indication of a company's quality. It is no coincidence that some of the most attractive dividend yields are currently being paid by the big multinational companies that are also most exposed to the places in the world where there is actually still some decent growth, the emerging markets.

Dividend income, unlike that from fixed interest securities like bonds, tends to grow over time. For the past 50 years or so that has meant investors have been prepared to accept a lower ongoing yield. But today many blue-chip companies are paying a higher yield on their shares than their bonds. High and growing income is a powerful combination.

With the developed world's baby boomers edging towards retirement, the demand for income-generating investments can only increase. If I were looking to relaunch that newsletter today, I can't help thinking it would be called Investing for Income.

Tom Stevenson is an investment director at Fidelity Worldwide Investment. The views expressed are his own. He tweets at
@tomstevenson63

View the original article here

Flat-Earth European Central Bank misreads oil spike again, and kicks Spain in the teeth

Dr Weber could hardly have done more to fuel the raging flames of euroscepticism in Germany, where 189 professors have warned of "fatal consequences" if the EU crosses the Rubicon to a `transfer union’ of shared debt liabilities. The three Bundestag blocs in Angela Merkel's coalition have issued a paper virtually ordering her to resist demands for yet more bail-out concessions at this month’s EU summit.

So yes, the ECB has a credibility problem in Germany. Yet to raise rates into an oil shock – as it did July 2008 when the global system was already buckling – is the central banking cousin of Flat Earth belief.

This is not a repeat of 2008, of course, yet something is still deeply wrong. The M3 money supply contracted in January and December. It has been negative since August (from €9.52 trillion to €9.48 trillion), and so has narrow M1. Private credit is growing at just 2pc.

This is the same bank that sat on its hands through the torrid autumn of 2005, keeping real rates negative as M3 growth rose at 8pc (double the ECB’s reference rate of 4.5pc), and as the Irish/Club Med property bubbles spiralled out of control.

Germany needed rates below the Euroland equilibrium at that moment. This is dirty secret that almost everybody in the German policy debate now chooses to forget, or never acknowledged. The ECB discriminated against Club Med. I should have thought Spain could sue the bank for misconduct at the European Court over that breach of its mandate.

Spain is now being whacked again. One-year Euribor rates jumped 14 basis points to 1.92pc within hours after ECB chief Jean-Claude Trichet uttered the code words “strong vigilance”. As the ECB knows, this is the rate used to price most Spanish mortgages.

Homeowners due for rescheduling in March will take the hit immediately. Fresh waves will follow each month, with knock-on effects for banks and Cajas already grappling with record defaults. Fitch Ratings said on Friday that the financial system will need €38bn in fresh capital to right the ship.

The Spanish might justly feel aggrieved, and judging by the comment threads of the Madrid press – "Put Trichet on trial", "Leave the EU immediately", "Create a currency for the South" – a vocal minority of Spaniards are going through their moment of EMU Epiphany.

Spain is doing what is required: slashing its twin deficits; biting the bullet on the Cajas (unlike Germany with the Landesbanken); and boosting exports faster than France or Italy. But Spain's chances of pulling through without a blow-up are contingent on EU authorities not committing another of their serial stupidities.

It was Mrs Merkel's call for creditor haircuts in October that pulled the rug from under the Irish, and set off EMU's Autumn contagion. Now the ECB is tossing its own hand-grenade into the peripheral debt markets, and doing so before there is any grand deal by EU leaders on a viable EU rescue machinery.

A month ago Mr Trichet sought to dampen prospects of a rate rise, insisting that inflation was "contained". Since then there has been a Mid-East revolution, the loss of 1m barrels of day (bpd) of Libyan oil, and a $15 premium on Brent crude to reflect the risk of Saudi revolt? This is dramatic, but not in itself inflationary.

Oil supply shocks depress the rest of the economy. They drain demand, acting as a tax siphoned off to Mid-East rentiers or the Kremlin. Headline inflation rises, but it signals the opposite of what is happening below the water line.

The ECB seems caught in a 1970s time-warp, wedded to the fallacy that the Yom Kippur oil shock caused the Great Inflation. The actual cause was rampant growth of the broad money supply, US spending on the Vietnam War and the Great Society, and a near ubiquitous picture of over-stimulus and over-heating across the West. It was a demand story, not a supply shock. Chalk and cheese.

The West is not over-heating today, except perhaps Germany, and that may not last as China slows. The eurozone grew just 0.3pc in the fourth quarter of 2010. The UK contracted. The US labour participation rate has continued falling over the last year to 64.2pc, the lowest since 1984.

Yes, China, India, and Brazil are overheating, pushing up global crude, metal, and grain prices. China alone is adding 850,000 bpd of oil demand each year, eating deep into global spare capacity. This is indeed a commodity demand story for the BRICs, but it has the characteristics of a supply shock for the West. There is nothing the ECB can usefully do about this, and it is suicidal to try. It is the task of the People's Bank to curb China’s credit bubble.

Trichet invoked the ECB's shibboleth of "second round” inflation effects. This is a sick joke as Spain and Portugal cut public wages by 5pc, Italy imposes a pay-freeze, and Ireland cuts the minimum wage by 11pc.

What he really meant is that settlements in Germany are creeping up. The car workers union IG Metall has secured a pay deal of 3pc to 3.5pc. Higher pay in Germany is exactly what is needed to help narrow the North-South gap in competitiveness without forcing wage deflation on Club Med, and it is exactly what the EMU-lords refuse to countenance. So the whole Euroland system must have a 1930s deflation bias.

It is twelve years since the launch of EMU. There has been no meaningful convergence of the disparate economies since then. The one-size-fits-all monetary policy continues to cause havoc. All that changes with the evolving economic cycle is a rotation in the locus of stress, and a change in its features.

Meanwhile, everything is tilted to meet the German imperative, but not enough to satisfy Germany. Nobody is satisfied.

Membership of monetary union as currently constructed is like walking with a sharp stone in your shoe, forever. You can put up with it, or take the stone out.

View the original article here

This post was made using the Auto Blogging Software from WebMagnates.org This line will not appear when posts are made after activating the software to full version.

Cotton climb again record cold China

Fiber Monday struck $1.2471 book, increasing from 4 2pc, or 5 cents, which is the maximum allowed by the CEI scholarship in New York.

Chinese weather forecasts say that snap cold current will last at least another day.

Prices increased 9pc last week, adding to the high hit record 140 years on October 15, hail storms hit southern américain.Texas is the largest producer of cotton in America, which is the largest exporter in the world.

There are mixed views as to whether if the current high prices will remain.

"Players on the market of cotton are providing prices in the long term," said analysts of Commerzbank.Large State buyer India India, cotton company expects a correction in the coming months as well US and Indian crops have boosted .Cependant supply, prices should be capable of supporting the $1 a brand of books for the next three years to the back of robust demand growth and consumption of low storage report. »

The Department of agriculture estimates that the stock will drop by 4 3pc in the first six months of the year prochaine.fournitures were not so tight since 1995 and the prices are already 58pc place in New York this year.

Rabobank analysts believe there are six main reasons why the price of cotton is also high: tightening the Americans, the basics, the battle of arable land, a deterioration in Chinese culture, the weakness of the dollar, the Indian export ban and floods in Pakistan.

"Basic tightening global market has been extremely favourable price, but too has the weakness of the dollar and strengthening speculative interest," they said. "" """Unlike the event price in March 2008, Rabobank believes that this rally is more sustainable".

View the original article here

Cotton climb again record cold China

Fiber Monday struck $1.2471 book, increasing from 4 2pc, or 5 cents, which is the maximum allowed by the CEI scholarship in New York.

Chinese weather forecasts say that snap cold current will last at least another day.

Prices increased 9pc last week, adding to the high hit record 140 years on October 15, hail storms hit southern américain.Texas is the largest producer of cotton in America, which is the largest exporter in the world.

There are mixed views as to whether if the current high prices will remain.

"Players on the market of cotton are providing prices in the long term," said analysts of Commerzbank.Large State buyer India India, cotton company expects a correction in the coming months as well US and Indian crops have boosted .Cependant supply, prices should be capable of supporting the $1 a brand of books for the next three years to the back of robust demand growth and consumption of low storage report. »

The Department of agriculture estimates that the stock will drop by 4 3pc in the first six months of the year prochaine.fournitures were not so tight since 1995 and the prices are already 58pc place in New York this year.

Rabobank analysts believe there are six main reasons why the price of cotton is also high: tightening the Americans, the basics, the battle of arable land, a deterioration in Chinese culture, the weakness of the dollar, the Indian export ban and floods in Pakistan.

"Basic tightening global market has been extremely favourable price, but too has the weakness of the dollar and strengthening speculative interest," they said. "" """Unlike the event price in March 2008, Rabobank believes that this rally is more sustainable".

View the original article here