The world is all about Greece again.
These days, there is more media coverage on Greece
than the Oscar. No one has the crystal
ball and the outcome could be as surprising as Southampton’s performance in
Premier League this year. Stock market seems
to be the winner so far with Eurostoxx 50 Index up 11.8%. Mainly thanks to the
weak EUR.
FTSE100 is also performing and it is up 5.3% for
the year as of 23 February. Not bad in
the mist of another Grexit episode. Tesco
is the best performing stock in the index.
The stock is up 27.8% so far this year.
This is a rebound story as Tesco share price was halved last year from
340p level to as low as 155.4p on 9 December 2014. The correction in share price was mainly
reflecting the expectation of poor earnings in 2015 which earnings per share is
expected to be a third of 2014 according to Bloomberg data. No one wants to invest in a future
loser. Somehow, the market believes the
business is going to turn the corner in the future and Tesco share price started
to rebound to 240p level. If you look at
Tesco share price past 12 months return including dividend payout, it is still
down 24.8%. It is a GBP 20 billion
market capitalization company and a lot of wealth is created or destroyed as
the share price goes up or down.
Mondi Plc, a packaging and paper company, also
rallied 21.1% this year. Building
materials giant CRH Plc, publisher Pearson, fashionable Burberry Group are up
17.4-19.4% to occupy the top 5 spots of the ladder. The worst performer is energy expert Centrica
plc and even that is only down 10.2% year to date. This reflects there was no big loser in the
index in 2015, so far.
The currency world is probably easier to understand
for a change. The GBP has taken a leap
against the EUR. At the beginning of
2015, GBP 1 was EUR 1.27 and in February, GBP 1 can get EUR 1.36. It was only March 2014 when a pound could
only get EUR 1.19. The Euro zone problem
really has not been resolved despite the billions being printed. The fundamental issues just got sweetened
like an espresso with 2 sugars. Could
GBP EUR get back to 1.50 level as in 2006 before the global financial crisis?
EUR against the US Dollar is even more dramatic. In May 2014, it was EUR 1 to USD 1.40 and on
23 February, it was EUR 1 to USD 1.13 which is a 19% depreciation in EUR in 10
months. This is the steepest drop since
the beginning of 2010 which was against due to Euro zone crisis. Could EUR USD get back to 0.823 level as in
October 2000? Or when will we see EUR 1 to USD 1.60 as in July 2008? The latter seems like mission impossible at
the moment but what if the weaker members have a peaceful exit and EUR becomes
more like the good old Deutsch Mark?
Let’s look back at the 2000 era when Euro in coins
and notes were first circulated in 2002.
At that time, there were a lot of unknown about the Euro. If there is a Grexit, Euro zone could be back
in time before Greece started using EUR. The market would speculate who would be the
next to give up using EUR. Such
uncertainty would be a big shock to the world and EUR could be first sold off
due to the uncertainty. However, EUR
could rebound afterward as the stronger countries like Germany would weight
more in the currency. The swing might
even reach the high and low of the past decade.
What does it mean for GBP? GBP 1
was good for EUR 1.65 in 2001. Back in
2001, it was GBP 1 to USD 1.40 which we actually saw again in January 2009 (GBP
1 to USD 1.35) after Lehman Brothers went under. History could repeat although under totally different
situations and circumstances.
The falling oil prices have found support around
USD 50 a barrel. In terms of magnitude
of this massive drop from USD 100, this is the biggest since the USD 147 to USD
40 drop in 2008. Oil prices were between
USD 20-40 from 2000 to 2003. Oil prices
are volatile by nature and oil producing countries like Russia and Venezuela
are selling oil to stay alive no matter at what price. The fundamentals are so different now than
ever with green energy development and human behavior such as the acceptance of
electric cars. If Apple really launches
electric car in 2020 as rumor said, it will be a landscape change in the energy
eco-system.
Gold prices have been hovering around USD 1,200 and
USD 1,400 per onze in the past 12 months and to be fair, spending more time
defending USD 1,200 level than challenging USD 1,400 resistance. Gold, if you view it as an alternative currency,
does not pay interest. Swiss Franc now
charges interest. For institutional
money that needs to get out of EUR and already max out on how much USD and CHF
they could hold, gold was a good parking space.
JPY is not a trendy currency to own
and GBP is not really as globalized as USD or EUR as a trade currency. If US Fed increases interest rate in
September 2015 or the commodities currency like Canadian Dollars and Australia
Dollars reach bottom, money may leave gold again.
