29 June 2012
Inside
Investment Ideas: Our strong
convictions
Equities: Second quarter
earnings previewed
The latest European summit has (so far) been greeted, like so many others, by a classic
beta bounce in the markets. We are sceptical that this bounce will continue through the
summer: the euros existential crisis has not suddenly gone away as weve noted here
often, the necessary integration and reform will take years, not days and there are many
practical uncertainties still to be resolved even around the measures just announced. That
said, the Commissions statement in particular is admirably direct and brief, and does at
least confirm that euro area politicians increasingly get it. A muddle through is still likely.
There are (so far) two components to the summit news: a palliative economic initiative
involving the European Investment Bank, and (more importantly) a package of financial
proposals from the Commission aimed at stabilising the euro area markets and banking
systems. Both hint at some modest compromise by Germany.
The economic initiative involves a small capital increase for the EIB that, when levered and
accompanied by structural funds, could reportedly result in 120bn (roughly 1% of area
GDP) of infrastructure projects in the next year or two. This is hardly transformative, but
may at least offer some modest cyclical and political support to the weaker economies.
The Commissions package has three important elements. First, it tasks the politicians with
considering quickly proposals for a single supervisory system for euro area banks, which
will allow future banking crises to be quickly dealt with centrally, breaking the vicious
circle between banks and sovereigns. Second, it makes it clear that the Spanish banks in
particular will be recapitalised by the EFSF (the short-term rescue fund) and eventually the
ESM, and that this will occur without the rescue funds gaining seniority to other lenders
(note: the statement also refers to Ireland being viewed favourably by the Eurogroup, the
only other country mentioned by name). Thirdly, it affirms that EFSF and ESM funds will be
used to stabilise markets for Member States, with the ECB acting as agent.
We see this as the beginning of the circling of the wagons around the systemically
important banks and markets that weve been expecting. As noted, there are still many
unresolved issues that could cause further volatility tellingly, Greece has not featured in
the commentary and communiqus as we write but progress is slowly being made,
albeit no doubt in a two-steps-forward-one-step-back fashion. Our Tactical Allocation
Committees recent caution on risk assets is focused near-term, over the next 3-6 months:
strategically, we expect neither the euro nor the global economy to meet with disaster,
and still see equities as offering the best long-term risk-adjusted returns.
Meanwhile, the most important economic news weve seen this week has been further
evidence that the US housing market is indeed continuing to stabilise (a key support for
our positive Investment Idea on the US banks aimed at more risk-tolerant investors only).
The July issue of Compass will be published next Friday: In Focus will be back on 13 July
Envisaged
time
horizon
13 Jan 2012
Multi-year
17 Feb 2011
Blue Chips
Performance
gauge/benchmark
2 years
6 Jan 2012
Multi-year
Gaining Exposure
to Income stocks
6 Jan 2012
2 years
Buy US Banks
4 May 2012
12 months
Idea
Rationale
Cross asset
Developed
equities to
outperform
bonds by more
than enough to
compensate for
risk
Equities
2 Mar 2011
2 years
Own a defensive
investment grade
credit portfolio
6 Jan 2012
2 years
Buy a basket of
oversold
European
Financials
08 Jun 2012
2 years
Buy basket of
selected EM Asian
currencies
4 Jan 2010
Multi-year
3 Feb 2012
6-12 months
16 Mar 2012
Multi-year
Foreign exchange
Commodities
Gain exposure to
long-dated Brent
crude futures
Overall performance to be reported quarterly in a separate note. Unless otherwise stated, Ideas are intended for investors with a moderate risk appetite
Equities
Q2 Earnings Season
Q2 reporting season is nearly upon us, with Alcoa (usually the first
company to report) set to unofficially kick off proceedings on 9th
July. The quoted corporate sector has exceeded analysts earnings
expectations for 13 consecutive quarters and analysts will be keen
to see whether this run can continue in what are difficult
conditions.
The effects of weaker-than-expected global growth, as well as the
uncertainty caused by the sovereign debt crisis, are likely to
impact on many companies results. Expectations for this quarter
have fallen consistently this year (Figure 1). A number of
companies have reduced guidance recently and 13 consecutive
quarters of earnings beats might suggest that corporate
management are simply improving their control over analysts
forecasts.
7.1
26.4
106.5
28
106.0
27
105.5
26
105.0
25
104.5
24
6.9
26.2
6.7
26.0
6.5
25.8
6.3
25.6
6.1
25.4
5.9
25.2
25.0
Dec-11
Jan-12
S&P 500 (lhs)
5.7
Feb-12
Mar-12
Euro Stoxx (rhs)
Apr-12
May-12
5.5
Jun-12
104.0
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
23
Jun-12
2012
2013
2012
2013
87.5
47.8
14.1
8.3
7.9
9.3
12.5
9.4
8.7
7.0
3.3
45.4
12.1
9.5
13.6
12.7
13.4
9.9
27.0
14.4
12.5
11.9
12.8
10.3
9.9
13.1
10.9
9.9
10.5
11.3
9.1
9.1
10.3
9.5
8.8
Developed markets
US
Europe ex UK
UK
Japan
Asia ex Japan
Emerging markets
1 LTM
Global Market
Capitalisation
(%)
LTM
10 Year Ave.
LTM1
12.5
18.0
13.3
18.6
10.7
16.3
10.1
13.2
16.1
0.5
11.5
15.4
10.4
14.1
Source: FactSet, Barclays Strategy
Equity Insights
We have compiled lists of stocks that we believe will give clients the means to take advantage of certain identified trends in the market
place. Please speak to your relationship manager for more details.
Asian Fusion
We continue to like emerging market economies, in particular in Asia, where our bullish economic growth story still prevails. Developed
market equities with a proportion of revenues pointing to emerging economies are one means of accessing this theme.
Energy Stocks
We continue to carry a positive recommendation on the energy sector globally, seeing valuations as attractive and oil prices as well
underpinned by tight supply, even in the absence of elevated tensions in the Persian Gulf, and recovering demand. We have compiled a list
of stocks enabling clients to gain exposure to the sector through our preferred names.
M&A
Gaining exposure to rising M&A activity has been an investment theme we have had in place since the start of the 2010. The basis for it
remains unchanged. Put simply, funding is cheap and equity valuations, particularly those of developed market equities, look appealing.
For clients willing to get exposure to this theme, we have assembled a list of stocks which we believe offer some potential for M&A /
restructuring activity, and where this potential is not already priced in.
Pricing Power
Consensus forecasts for inflation suggest mild and manageable rises in US CPI for the next couple of years, and a gradual pull back in UK
CPI this year. Whilst it is not our central view, there are fears that these forecasts underestimate the effects of ongoing easy monetary
policy. In terms of hedging this risk, unfortunately there is no magic bullet no single investment that serves as a perfect hedge in all
periods of inflation. However, one option is equities
Weekly vs. year to date equity market returns
YTD % return
-8
-6
-4
-2
Consumer Discretionary
20
Utilities
MSCI dev. mrkts
15
Consumer Staples
10
S&P 500
Telecoms
DJ Eurostoxx 50
Energy
Nikkei 225
Materials
Financials
FTSE100
Information Technology
Health Care
MSCI EM
Industrials
-2.0
-1.5
Weekly % return
-1.0
-0.5
0.0
0.5
Weekly
1.0
1.5
Year to date
MSCI AC World
amie.stow@barclays.com
fadi.zaher@barclays.com
Fixed income
3500
CPI, %
7
3000
2500
2000
1500
1000
500
0
03/01/2012
03/03/201
03/05/201
Spain 10Y vs Germany 10Y
Greece 10Y vs Germany 10
0
UK
2010
2011
Developed Emerging
2012
2013
Yield, %
3.0
2.5
2.0
1.5
1.0
0.5
0.0
1
3
US
7 9 11 13 15 17 19 21 23 25 27 29
Germany
UK
Source: Barclays
**Markit provides a family of credit default swap (CDS) indices. iTraxx main 125 European IG issuers; iTraxx Snr financials 25 European senior financials;
CDX IG 125 North American IG issuers; iTraxx XO 50 European HY issuers; CDX HY 100 North American HY issuers
CoCos
For high composure and high risk profile investors, contingent convertibles (CoCos) provide attractive risk-adjusted yields. Recent
market volatility has caused these to sell-off but we believe prices will rebound. Lloyds remains our favoured issuer in this space.
Low risk
Lower tier 2
Convertibles, dated suboridnated debt
Upper tier 2
CoCos, perpetuals (coupons are deferrable
and cumulative)
Loss absorbance
High risk
Tier 1 (Core)
Ordinary shares, retained earnings, reserves
(coupons are deferrable and noncumulative)
Source: Barclays
Source: Barclays
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