Draghi’s bull run 25 September, 2012.
Thank you!
Mario Draghi kept his words and did “whatever it takes to preserve the
Euro”. Within his mandate as the
president of the European Central Bank, he is going to buy Italian and Spanish
bonds to put a fully effective backstop to the Eurozone’s debt crisis. He substantiated his “OMTs” which stands for
“ Outright Monetary Transactions” (although some thought it means “On Merkel’s
Tap”. The decisive speed by Draghi sent
institutioins chasing anything but cash.
Let us start with the stock market.
September has been a good month for stock
investors in general. FTSE 100 that
contains the top 100 companies by market capitalization traded on the London
Stock Exchange challenged the 6,000 psychological level that we have lost since
July 2011. The FTSE100 index is up 4.8%
since beginning of 2012 and the top 5 stocks have rallied over 40%. Lloyds tops the chart with 55% positive
performance. Look for theme, there are 5
financial stocks in top 10. Other than
Lloyds, we see Hargreaves Lansdown (+49%), Aberdeen Asset Management (+45%),
Standard Life (+35%) and RBS (+35%).
Perhaps the financial sector is getting to the end of the tunnel and
their share performance is getting ahead of the earnings recovery. On the other side of the pendulum, one may be
surprised to find 2 supermarkets in the list of 10 worst performing
members. WM Morriosn and Tesco are down
10% and 16% respectively. Slow growth in
sales plus a very competitive environment are some of the factors that put
pressure on supermarket valuation. There
is an obvious pattern at the bottom occupied by 4 miners. Anglo American, Kazakhmys, Evraz and Eurosian
Natural have 21-48% negative perform in 2012.
Media have talked about how a slow down in China economy could affect
the resources world. This has now become
a reality and has a massive impact to mining stocks.
Looking at the Eurozone as a whole, the
picture is pretty and merry. Zara, the
Spanish fashion chain, is listed under the name Inditex and it is up 54% year
to date. Cheers to the Belgian beer
company Anheuser-Busch Inbev that delivered 42% positive price
performance. The more Stella Artois,
Budweiser and Becks we drink, the better revenue for them. The biggest loser in share price among the 50
members in Eurostoxx 50 is Nokia. The
ex-king of mobile phone is struggling to find breathing space between Apply and
Samsung. Overall, Eurostoxx 50 Index is
up 10% year to date. Considering the
mess in the Eurozone, this is exceptional.
Dow Jones Industrial Index has matched
Eurostoxx 50 performance and it is up 11% in 2012 so far. Similar to the UK market, top of the league
table is the mighty Bank of America which has gone up 65% since beginning of
2012. JP Morgan Chase and American
Express are up 24% and 22% respectively.
Hard to say whether the tightening regulations are working or the
bankers are working hard. Media has been
going on about recovery in the US housing market. Home Depot is up 41%. Walmart has a very different year versus Tesco
and its share price is also up 41% year to date. Surprisingly, McDonalds is the second worst
performing stocks in Dow Jones and it is down 6.6%. We thought recession will encourage more
people to Mackie-D. Bottom of the league
is Hewlett-Packard lagging by far with minus 33% performance. Consumers are busy chasing mobile gadgets and
leaving their PC at home. Overall, one
can see a recovery theme happening with the housing market and financial industry
in the center court.
Draghi’s intention to save Euro with easing
money supply was echoed by US and Japan with real action. With 3 mighty central opening the tap and
money flowing into the system, investors are concerned about inflation. Many investors believe gold is a good hedging
instrument against inflation and gold price rallied 10% from USD 1,600 per
ounce in mid August to USD 1,760 in September.
Silver is even more volatile and rallied 25% from USD 28 per ounce to
USD 35 during the same period. Both gold
and silver are trading at top range in the past 12 months. Worth pointing out silver had a spike in
February this year and reached USD 37.48.
Another key factor for rally in gold and
silver prices is the weakness of US Dollar.
The USD Index is the average of exchange rates between the USD and major
world currencies and it indicates the general international value of the
USD. In the past 12 months, it hit a one
year high of 84.1 in July and spend most of September below 80. To bring this closer to home, GBP USD
exchange rate moved from a 6 months low of GBP 1 for USD 1.53 in the beginning
of June to 1.62 level in September. That
Sterling has gone 5.9% stronger in less than 4 months. Sounds like a good time to take a holiday in
the States. The correlation between a
weakening US Dollar and a strong stock market is also observable. FTSE 100 rallied from 5360 in June to a high
print of 5933 on 14 September, a 10.7% rally.
When compared against the Euro, the US
Dollar has been strengthening from EUR 1 equals USD 1.425 in Oct 2011 to 1.204
in July. That’s a massive 18.4%
appreciation in US Dollar against the troubled Euro. The timing of Draghi’s “whatever it take”
speech in last July marked a recovery of Euro and it rallied against the US
Dollar to 1.317 level on 17 September.
Then the Euro retreated back to below 1.30 as of 24 September. The rally of Euro since Draghi’s speech also
had the same effect against the Sterling.
GBP EUR exchange rate fell from a 12 months high of 1.290 on 23 July to
1.232 on 14 September. The question we
have to consider is whether Draghi’s magic has fundamentally changed the course
of Euro weakening or it just gives the Euro bear an excuse to take profit.
Of course, policy from the European Central
Bank President has an impact to the market but many institutional investors
continue to have doubts on the execution.
There are small prints in Draghi’s speech and there are conditions
attached to ECB buying bonds. We cannot
blame the bears to be unconvinced by Draghi as there is no real recovery in the
peripheral countries’ economy. The word
recession is written on the wall and many professional investors refuse to take
steroid as a cure. The is exactly why
the investment world is interesting. You
need buyers and sellers to make a deal and at the moment, we see some increase
in turnover after a very quiet summer.
It is always nice to start the autumn term with a rally and let’s hope
the bull will last until Christmas.
Talking about Christmas, for Apple fans,
Christmas has come early this year with the launch of iPhone 5. It is longer, faster, slimmer and better
looking than the iPhone 4. What more do
you want in a phone? That’s why it sold
5 million units in the first 3 days of launch.
That is after hitting a record of breaking 2 million units in the first
24 hours of sale. The lowest
specification is 16 GB and it is at GBP 440.83 before VAT. 5 million units mean more than GBP 2.2
billion sales revenue in 3 days. The
next record for iPhone 5 to break is to sell 20 million units in 100 days that
is set by Samsung Galaxy S3. 20 million
units of iPhone 5 will mean more than GBP 9.7 billion sales revenue. To put this into a Eurozone prospective,
Greece bailout program is GBP 138.4 billion.
Although iPhone 5 is not enough to save Greece, it has given Apple an
amazing run in its share price and Apple became the biggest stock ever in
August. The rally continued into
September and the stock ticked USD 705.07 per share on 21 September. An interesting fact for Apply fans: when they
bought iPhone 4S upon launch on 4 October, 2011, perhaps they should have
bought Apple shares. The stock has gone
up 86.9% since then. In the same period,
ARM, the company that provides the iPhone CPU solution, went up 8.3%. Foxconn, the manufacturer of iPhone, its
share price went down 28.9%. Apple is an
amazing innovator and marketing machine but it is probably a very tough company
to negotiate commercial terms with.
The fourth quarter of 2012 is going to be
interesting. We maybe at a tipping point
of investment sentiment, shifting from fear to greed. With the recent rally, UK, Germany and US
stock markets are 5-15% away from their 2007 peak. For equity investors in these markets and if
they happen to have left the planet for 5 years, they would not believe there
are Global Financial Crisis and Eurozone’s debt crisis. Considering some dividend income in the past
5 years, most investors should be happy with their stock portfolio especially
if they focus on ETFs linked to FTSE100, German DAX and S&P 500. The good thing about ETFs that link to
indices is that they offer diversification.
For example, FTSE 100 contains 100 companies, through investing in FTSE
100 ETF, investors practically invest in 100 companies with good
diversification in different sectors. As
we see from some of the top performing stocks in the beginning of this article,
even professional investors could have missed the winners.
(Source:
Internet and Bloomberg as of 24 September, 2012)
