Initiative aims at providing additional revenue stream for school transport operators
uae2 hours ago
The euro has fallen to 1.15, as I predicted last week. It is difficult to be bullish about Europe's Stoxx 600 index, 386 as I write. The G7 debacle in Quebec and Trump's tariffs demonstrate that Europe is far more vulnerable to international trade tensions than the US. Italian government bond yields are still elevated at 2.85 per cent, a metric of sovereign risk. German and French industrial production data has slumped and the growth data momentum has decelerated. This is negative for second-quarter eurozone growth.
European earnings estimates are still far too optimistic since key sectors and industries will be hugely impacted by exposure to distressed emerging markets - Brazil, Turkey, Argentina and South Africa. For instance, French supermarket chain Carrefour derives 17 per cent of global sales from Brazil alone. Unicredit owns a strategic stake in the Turkish Yapi Kredit Bank. Spanish banks Santander and BBVA have huge listed subsidiaries Brazil and Argentina. Glencore, Anglo-America and Barclays have significant exposure to South Africa. Europe is not immune to an emerging markets crisis. The ECB's scale of bond buying will eventually decline, a bearish prospect for equities.
Valuations in Europe are optically "cheap" but the Old World abounds in value traps. Without a credible FANG growth names, Europe exports risk capital to Wall Street and China. Russia is under sanctions. Brexit still unnerves markets. Trade wars negate the synchronised global growth argument that still boosted Europe in 2017.
Value buys? Spain's country index fund could be a profitable investment in th second half of 2018. Socialist Prime Minister Pedro Sanchez seized power from Mariano Rajoy, who lost a vote of no-confidence in the Cortes due to a corruption scandal. Even though Podemos helped Sanchez win power, he has unveiled a pro-EU, pro-euro, centrist cabinet. Spain's Ibex 35 has been the second-worst performing stock market index in Europe since the trauma of the Catalan secessionist vote and Rajoy's political woes in 2017. Spanish equities have been derated to a mere 12 times earnings, well below their 13.5 times fire year average even though GDP growth has accelerated to 2.7 per cent, the property market is booming, tourist arrivals have beat records and earnings momentum revision is positive. If Sanchez consolidates power and defuses the Catalan time bomb, Madrid's Ibex 35 could be a candidate for a valuation rerating.
Swiss financial colossus Zurich Insurance has been unjustifiably slammed by eight per cent in the stock market due to its $10 billion Italian government bond exposure. Zurich Insurance is now a steal at 12 times forward earnings and a 4.6 per cent dividend yield, a compelling buy at 280 Swiss francs for a 340-360 franc target. There are multiple catalysts for a rerating in Zurich Insurance shares. One, investment yields have crept up to 2.9 per cent, above its accounting yield. Two, its Farmer subsidiary is in turnaround mode. Three, the decision to slash its loss making commercial motor business in North America and cut costs by $400 million will improve the firm's combined ratio. Zurich Insurance is a favourite for Swiss/German income obsessed fund managers, who will buy the shares now that new Italian Finance Minister Giovanni Tria has reassured the markets on the euro. My other favourite stocks in Switzerland are Novartis, Adecco and UBS (though not at current prices!).
Trump has threatened 25 per cent tariffs on European auto imports. This will be devastating for BMW, which sells one-tenth of its global vehicles in the US and Daimler sells eight per cent of its global volumes in the US, though Volkswagen sells only three per cent, despite the global fallout of its Dieselgate scandal. If the companies pass on tariffs to consumers, they will erode their competitive position in the US auto market. A double-whammy for Daimler is that its profitable US truck business will be hit by higher steel and aluminium prices due to Trump's tariffs. For now, I would avoid German autos. BMW can well fall to 75 euros, despite its electric car momentum and uber-modest seven times earnings valuation multiple.
While French oil supermajor total met and exceeded by ?50 price target, I would once again buy the shares if they fell below 45 euros, which can well happen if Brent crude trades down to $65 as Saudi Arabia and Russia expand their oil output. The geopolitics of Iran sanctions is also negative for Total. I am not a fan of European defensive sectors but believe Danish diabetes firm Novo Nordisk and Swiss immune-oncology giant Roche Holdings are both unique global franchises.
The writer is a global equities strategist and fund manager. He can be contacted at mateinkhalid09@gmail.com.
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