Europe: Buy - SAMPLE REPORT
Summary
Expect the ECB to be increasingly aggressive in its rate hikes, what with private consumption gathering steam. Nevertheless, Europe’s profits outlook is healthy very much because of strong productivity gains. All of which makes for an attractive market.
The Economic Time™
Monetary Economy:
Eurozone inflation has been accelerating since February 2004. Core inflation lags overall inflation: since it bottomed in July 2005, core inflation has accelerated by 25%. Because of rising core inflation, the European Central Bank (ECB) wants the monetary aggregates to contract. Reserve money contracted the most in March 2003 and began registering positive annual growth rates only last September. Now it is growing 3.4x faster than last September! Growth in M1 is the strongest of all the aggregates, what with overnight deposits rising by 16%. M2 growth is accelerating gently, what with deposits up to two years rising strongly. Growth in M3 is accelerating in line with M2 and with more deposits over 2 years. Lending is growing about 3x faster than when it bottomed in February 2003, driven by loans to other Euro area residents. Monetary Financial Institutions’ holdings of external assets are racing along at 20% growth rates, while their holdings of shares and securities keep accelerating mildly. The ECB started its tightening interest rates in from 2% in December 2005; currently they stand at 2.5%. The yield curve has flattened considerably since then: short rates have budged little while long rates have converged. Inflation is rising, inter alia because the lagged effects of the falling Euro’s exchange rate from May 2003 – December 2005: this was driving up import costs, especially if US dollar-denominated. The market wants to believe that with Euro rates rising, the Euro has to keep rising especially against the yen, but also against the dollar. On a three month monetary policy view, expect the ECB to raise rates, i.e. nurture an excess demand for money: Mr. Trichet keeps saying this; futures trading suggest rates of 3.25% by this December, but we think that 5% is more realistic by mid 2007.
Real Economy:
Growth is robust partly because the policy mix remains growth-friendly. The ECB’s monetary policy hitherto has been to create an excess supply of money. And fiscal policy is expansionary in that general government outlays are rising by three percent a year. In more recent history, GDP bottomed in 2Q03 and has been accelerating timidly since – primarily due to more exports, government consumption and somewhat faster private consumption (reflected in slightly stronger retail sales). By country, growth has been strongest in Spain, Norway, Ireland, the Czech Republic, Estonia and Lithuania, and is rebounding in the UK. By sector, construction is growing the fastest, with rebounds in finance, manufacturing and energy. Industrial production has been accelerating for a good year, especially in energy, consumer durables and capital goods. On a three month macro profits view, things should improve. Not only is Europe at the start of the tightening cycle; the policy mix remains pretty growth-friendly. Also, productivity keeps accelerating while wages are decelerating, so unit labour costs are contracting by an annual 0.3%. So, margins have to expand, and turnover will keep rising.
Sectors
Strong Buy Sectors
- Hotels & Travel Services
Buy Sectors
- Telecoms
- Media & Publishing
Strong Sell Sectors
- Iron & Steel
- Insurance
- Finance & Securities
- Energy
- Construction Materials
- Chemicals
- Banking
- Automotive
Sell Sectors
Hold Sectors
- Technology
- Retail Trade
- Health Care Services
- Foods & Beverages
- Energy
