FYI | May 02 2007
Have global equities landed in a sweet spot? It would certainly appear that way.
Yesterday I concluded my Weekly Analysis with a reference to Macquarie Bank economists who stated something along the lines of: as long as the US economy doesn’t fall off a cliff and US corporate profit growth remains sufficient to sustain employment growth, increasing global liquidity will keep equity markets going.
Many other commentators have already pointed out that a slowing US economy is not necessarily bad for equity valuations. In fact, sometimes when corporate profits are growing fast central bankers feel inclined to apply the brakes through higher interest rates and this is usually a much worse situation than the one we’re facing in May 2007.
Similarly, some commentators who recently traveled to China, have returned with a more positive view on the immediate economic outlook inside the country. In their view the overcapacity issue in industrial sectors which caught so many headlines last year and dominated Chinese economic policy making throughout 2006, is no longer an issue of importance. Chinese entrepreneurs have found the solution by shipping more of their products overseas. (Which is remarkable as this is exactly what the worrybeads thought would happen. However, it has happened but without the economic Armageddon that was anticipated to follow.)
Admittedly, it is difficult not to agree with the view that if the global economy continues its pace of solid growth, and inflation remains as subdued as it currently is, the outlook for equities remains as sunny as can be.
I read an interview with ex-Morgan Stanley strategist Barton Biggs this week. Biggs was named top global strategist four times in the nineties by Institutional Investor magazine in the US. He is currently managing partner of hedge fund Traxis Partners. Biggs believes investors should be stacking up shares like there is no tomorrow. The Dow Jones (DJIA) could rise as much as 19% this year, he says.
In Australia some commentators have started to complain again about high Price/Earnings multiples. As shown by ResMed (RMD) recently when traveling at high speed a simple bump in the road can cause quite some damage.
Maybe, just maybe, those old PE principles require revision in times like these. It is difficult to argue that current macro-economic fundamentals justify an overall increase in PE multiples, but it is also difficult to ignore that private equity has landed on the shores of Europe and Australia, snooping away assets under the noses of local investors.
Amongst all this, it remains remarkable that the ones who should be seen as the main beneficiaries of the current global environment -resources companies- continue to be left behind in the overall PE re-rating.
I have argued before, and I will simply repeat the mantra again, this is because few people only are convinced current Super Cycle prices for commodities are sustainable. (Never mind resources are having their own consolidation wave). Merrill Lynch’s team of resources experts today again repeated their belief that copper might well be in a bear market suggesting the metal’s price outlook is bleak at best.
To others, such as the Super Cyclists at Barclays Capital, the secret is not the past, nor in mean reverting, it simply lies within China. Barclays’ analysts argued this morning that if you get your view of China right, you will get your view of commodities right.
Barclays agrees with many other experts that China will remain strong this year, probably recording something in the order of 10%-plus GDP growth over the year.
Maybe the wisest of all experts is US based trading guru Dennis Gartman who argued this week something along the lines of: I am bullish of gold, and will remain being bullish for the foreseeable future, but I’ve decided to stay clear of shares of gold companies and practice has proven me right.
I believe there is a real chance that Barclays & Co will end up being correct by the end of the year, but that because of Merrill Lynch & Co shares of resources companies will have remained laggards to both the broader market and spot prices of their main products.
Till next week!
Your sometimes I wish I would be proven wrong editor,
Rudi Filapek-Vandyck
(as always supported by the Fab Team: Chris, Terry and Greg)