JULY 2012 NEWS LETTER
“ON THE WINGS OF A DOVE” Inside this issue:
“Latin market and a new player in the AlphaCapita Oil sector ”
If the EU was a racing pigeon, it would be called "Optimistic" and it would circle the acropolis looking for direction, only to be shot down by a Spaniard, picked up and sold to a German by an Irishman. The EU is having to make decisions again as a collective which is like getting the prisoners, the jail guards and the prison commissioner to agree on prison policies. The French refuse to serve Brie with the consistency of Palestine, Sacré bleu thank God. Greece saw the EU as a brand it wanted to be associated with so "played" with the paperwork, we knew and let them. The U.K followed their normal line of not "jumping the queue" and "rules are rules" attitude. And Ireland? well they saw the EU as a cow that needed milking. And to top it all the Germans just went and "vorsprung" the lot of us. It took 30 years to define "chocolate" within the EU so what, in reality, are the chances of us all managing to find a financial union solution? So after a good start to the year, we have again experienced high uncertainty and further volatility in the financial markets in Q2. The reason for this once again were the Greeks, their first election was not able to give a clear picture on who was going to run the new government, therefore a new election was ordered by the Greek President adding a further month of uncertainty. In the same period the pressure on the Spanish banks grew to new heights, bringing further pressure on the Spanish and Italian yields which hit a new EU area all-time high of 7,125%. Portugal, Ireland and Greece all had to ask the EU for assistance when
they reached the 7% mark. We must admit we had not seen this coming and as we have written in our Q1 newsletter, we did feel that the measures taken by the ECB had put a more positive tone in the market. The above outcome came as a surprise as we did not see any other solution for Greece than to vote for the EU package in the first election. Spain pressured, has recently sought support from the EU to finance the their banks. A loan package was presented, which created a short relief rally, but the detail regarding the package was very limited and the loan was to the Spanish Government and not directly to the banks. Thus, in effect creating a higher debt level and possibly new downgrades from the credit agencies. Climbing yields in Italy showed the market contagion. However, a part of this explanation had to do with support for the technocrat government, led by Mario Monti, which was weakening due to the very hard savings programs executed and the uncertainty if Italy was able to fund themselves. We clearly still have a lot of uncertainty and face more "problem resolving" before we will see more easing in the market. Some could say we are now at the third and hopefully the last phase of the crisis. The first phase being denial of Europe having a problem. The second being protests against governments and
thirdly, the one we are in, are authorities trying to find solutions to the problems. As we a have said time and time again, we are now at a time where a solution must be found for the future. So what has been done over the last two years? Well, the firewall has been increased to over a thousand billion Euro by implementing two resource funds, helping the bail out of Greece, Portugal and Ireland. A financial deficit program has been agreed and a banking package towards Spain has been introduced. However, at the present time we must admit this has not yet calmed the financial markets. So what do we need? In our opinion, and as we have stated so many times in our previous newsletters, a financial union is a must. We cannot have a common currency without having a common finance policy, working policy etc. The Euro was built on hopes and dreams that each country would react in the same way and have the same financial discipline. Clearly,
â€œHowever, as simple as it sounds, politicians will need to feel their "jobs
as one can see how the French flaunt all EU regulation on food, the EU individually has done the same financially. So to answer the question, integration and a banking union that does not only provide liquidity for the banks but aids solvency is what is needed, like they did in the U.S with "tarp". However, as simple as it sounds, politicians will need to feel their "jobs worth" and these ideas will no doubt be pulled from pillar to post prolonging any cure. If they could just implement a few ideas fast, creating important steps towards a union this would ease pressure in the market right now .Of course the recent election in Greece, with the win of the New Democrats has struck off one of the issues. However this must not take away the above focus on working toward more integration. In Asia we have recently seen that China has lowered the cash demands for banks, as the latest figures have shown growth declining. Coupled with the Chinese government having been out discussing their expectation for Q3 which should bring the growth back to over 8% p.a. This is key for the global growth. As focus is very much on the EU and EU deficit, many investors have forgotten to look at the U.S. Here the deficit continues to increase and the current debt ceiling is getting closer. Expectations are that if congress and the U.S President cannot deliver some kind of agreement to reduce this deficit, the regulations agreed on last summer will go into force. This will mean an amount of 600 billion USD will be taken out of the U.S economy yearly by cost cutting via military and social security. At the latest FED meeting they prolonged operation "twist", FED selling short term bonds and then buying long term debt, for another six months to the end of year. The market expectation was disappointing, however the statement from Chairman Ben Bernanke did show that the FED is ready to support further if needed. A clear sign of a continued bias towards easing. For investors it is important to note that the U.S central bank has more obligations in regards to stabilizing unemployment and therefore we have seen a lot more activity in comparison to ECB. So the next couple of months are going to be interesting to see if the FED is really going to support the market further. The unemployment rate is going to be a key figure to watch.
Strategy With all that we have said so far, it is important to note, that stocks are in general trading with very attractive ratios. However, further uncertainty in the EU and an unthinkable breakup of the Euro will cause all sorts of interesting valuations. Even as the price looks attractive at the present time they can easily go lower. So alongside U.S and emerging markets the present climate in the E.U causes dilemmas for long term investment strategies.
â€œNokia CEO Stephen Elop announced a downgrade of their results for q1 and q2."
By trying to protect our portfolios we have therefore in Q2 reduced our holdings in the more volatile equities. This does not mean we have sold out of them in totally, but simply reduced the amount held. The revenue of this sell off has been left as cash for the moment. We also reduced our allocation in corporate bonds. This was done within the allocation of "higher risk rated" bonds as we did not want to be caught in a liquidity trap if the market went bottom up. We still like this asset class as we can get a decent yields. We will re-enter but we need more clarity regarding the EU crisis first. Our focus has not changed despite the recent turmoil. We still very much like to have a good diversification on the portfolios, and we still like investment cases with a long term view. We also still believe in the strategy of always being invested in equities. This strategy has in the current market resulted in more volatility in our portfolios than we like. We are strong believers that it is more or less impossible to time the market correctly at the moment, therefore "dipping in and out" of the market is not only risky, but also costly in our opinion. Looking into Q3 and the rest of summer, we still expect good earnings from the companies we invest in. For good earnings reports to actually reward stock valuations will very much depend on the tension in the EU easing. Also, we are getting closer to the U.S elections and as mentioned in other newsletters, we normally experience good returns in years with a US election. Of course it will be interesting to see how the central banks, FED, ECB, BoE, etc. will react going forward if tension is kept at this level. Lest hope that the central banks somehow will keep a floor under the financial markets. Argumentally not their true mandate, but as the politicians cannot find their way out of a room with the door clearly marked with the sign "exit", central banks will no doubt keep supporting in their efforts to deliver financial stability in the long term. So to conclude on our strategy, we keep a positive view for 2012 but it is going to be a bumpy ride. With clarity being the biggest problem at present, we have allocated our portfolios in a balanced manner. Meaning we are defensively placed with our bond and cash reserves, yet ready for a pull from recession in regards our present stock allocation. As things become clearer we will be able to start to re allocate in either direction.
ON CURRENCY As the tensions have raised we felt it would be too big a risk to keep our long EURCHF position, even after the SNB (Swiss Central Bank) had stated they would defend the 1,20 floor with all means. We therefore closed down the position with a 1% loss. Can the SNB continue to defend the CHF? Theoretically yes, as SNB can print money but it would be highly unlikely as this would have a negative impact on the economy in the future. According to latest figures from SNB (March) foreign currency investments amounts to 245.5 billion CHF out of a total currency balance sheet of 345.3 billion. How much of this is attributed with outright currency purchase is unknown, but it definitely shows that the SNB has been in the market buying foreign currency to keep EURCHF above the 1.20 level. We do expect the CHF to trade around 1.20 to 1.22 for some time to come even though the CHF is highly overvalued and hurting the future Swiss economy. We expect that a move toward the 1.25 level will happen, but not before the end of this year.
“Chart showing EURCHF spot”
In Q2 we also experienced a strengthening of the USD against Euro. This again, had to do with the flight to safety. As we have around 20% of our investments in USD, we have benefited on our performance with around 3%. If we look at the "Euro collapse" scenario, which is not a realistic case in our opinion. We take the view that, as we are predominantly invested in assets primarily in Denmark, Germany, UK and U.S. and should the reintroduction of the DEM (German D- mark) come, it would most likely be a much stronger currency, with some analysts predicting a strength of over 30% of the present Euro. The Danish Kroner will no doubt follow as it has been a tradition for the last thirty years that the DKK is linked to the D-Mark/Euro. Early on we would most likely see a much stronger USD and sterling, again flight to safety. So with our present geographical asset allocation we would be reasonably well positioned for such a Euro melt down.
ON STOCKS In Q1 we bought into Mobile producer Nokia after a long time of monitoring it. The surprise for us was therefore very big when Nokia CEO Stephen Elop announced a downgrade of their results for q1 and q2. Then came out recently downgrading the forecast further and reducing the work force by 10.000 employees. This was especially a surprise as in Barcelona he had announced, that "Nokia has now turned the corner and things were going forward" With all this new information out, we must admit that this is a big setback for Nokia. We cannot see any short term indicators which should turn a positive momentum on Nokia. We still believe in a turnaround of Nokia, but the share price will properly go lower before this can kick in. If Nokia comes down to two Euro we will rethink if it's a business case again. Our position closed due to our stop loss target triggering at €2.95 last week. Today Nokia is trading at 1.90 Euro level.
STOCKS - continued
“Chart showing BMW AG”
“Chinese Government indicating growth will come back in the second half of 2012”
Late Q2 we once again have re-bought into BMW. In Q1 we sold out with a good profit and as mentioned in previous articles, not because we did not like the investment case, but because of their very good performance and subsequent profit taking on our part. With the Chinese Government indicating growth will come back in the second half of 2012, we see continued sales within the Asian market.
Recently we have added more allocation into Petro Brass. Petro Brass has in the short term not performed in a satisfactory way. However, Petro Brass with one of the highest oil reserves on the planet and with expectations of higher oil prices, coupled with being a value stock with a good dividend payment, it still fits our oil and emerging market allocation. We are also currently positioning for more allocation into Siemens, one of our main holdings. Within
Siemens we strongly believe the focus for the future will be on internal cost cutting and further organic growth. Siemens is a well diversified stock and pays out a good dividend. As mentioned, we are keeping good reserves of cash as the future is understandably difficult to predict. We will however try to find good opportunities but keep stop losses tight.
ON BONDS “The bond market clearly shows the big imbalances we are experiencing right now.”
The bond market clearly shows the big imbalances we are experiencing right now. We are now seeing borrowing costs in the peripheral EU countries hitting new highs. At the same time we see negative yields or close to negative in countries like Denmark and Germany. This is not helpful at all and needs addressing. In Q2 we sold out of one of our corporate bonds, 11% ATU 2017. Nothing wrong with the issuer, but more to do with liquidity in view of the Greek saga. We realised a profit ranging between 10% and 2% depending on the clients original
entry point into this asset. We do believe in the "corporate bond" as a positive and a must have asset class going further into the year, especially as mortgaged and government bonds are producing such low yields. The latest survey from Moody’s, shows that the default rate is very low. At present we see a 3 % default rate, levels we saw before 2008. With Moody’s expecting in the short term, only a worst case rate of 7%, still historically low. We do expect as soon as the market normalizes, if there is such a term
these days, to see some big movements in yields on government bonds. Our strategies therefore continue to have variable bonds with short durations. When the time is right we will add more allocation to our position that will benefit from longer yields in US. But for now we intend to keep the powder dry especially if the FED continues with their bias towards easing as this would undermine this position on the short term.
AlphaCapita (Switzerland) SA
AlphaCapita (Switzerland) SA Balsberg CH-8058 Zurich-Airport Switzerland Phone: +41 43 813 3020 E-mail: firstname.lastname@example.org web : www.alphacapita.com
AlphaCapita recruits new Business developer Owain David - Business development United Kingdom It has been a key part of our strategy to have good people on the ground to help clients locally with their needs and aspirations within the financial markets. Owain has been known by AlphaCapita for many years and we are really proud to welcome him to the team. .
ON OWAIN Owain Rhys David, has a real passion for the markets, having followed a degree in Business Economics with a Masters in International Economics, Banking and Finance he has spent the last 7 years on the front line of Finance as an Inter Dealer Broker. Working within Equity Derivatives he has brokered deals between Investment Banks and financial institutions throughout Europe. Leading on from this financial Sales experience he has made a seamless transition into the Capital Raising division of AlphaCapita. Owain is an extremely personable and professional individual who acts with the utmost respect regarding private and sensitive information. This has been recognised in his career in Finance and has allowed him to network extensively with both senior finance professionals and Ultra High Net Worth Individuals. Outside the office Owain enjoys nothing more than watching or taking part in all sports especially Rugby, Golf and Skiing
Disclaimer None of the information contained herein constitute an offer to purchase or sell a financial instrument, or to make any investments. AlphaCapita (Switzerland) SA does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability to the accuracy or completeness of the information nor for any loss arising from any investment based on a recommendation, forecast or other information supplied from any employee of AlphaCapita (Switzerland) SA, third party, or otherwise. All expressions of opinion are subject to change without notice. Any opinions made may be personal to the author and may not reflect the opinions of AlphaCapita (Switzerland) SA.