Tagarchief: emerging markets

May 2001

May 2001

May 2001

A Financial Reassesment

Sell in May and go away

An old saying in the stock market is sell in May and go away, this indicated that the summer months historically did not deliver high returns on the stocks. The period from September/October until May were historically the best months to get a nice return on your investments. Is it still valid, should we consider to sell our portfolio and return after the summer break. The last couple of years did not support the old saying, on the contrary the summer delivered a nice return. The bull market and the holiday investors did give a boost to the market.

The year 2001 has not been a good year for the stock markets. The slow down of the economy and some lesser than expected numbers, profits, revenue and growth, of a number of companies made the market fall. Especially the Nasdaq and other technology heavy indexes experienced a near free fall in value. Companies have lost over 50 % in value compared to the unnatural prices of 2000 and before. The commuication and technology and especially the dot com companies, in short the ICT sector, had become very expensive in a very short time span. The ratios of those companies were staggering 80 to 120 times to even zero as profits were not yet realised but everybody wanted to be in. The demand was enormous and the price moved up accordingly. A bubble was created and what seemed necessary the bubble bursted as expectations could not be met and the economy started to grow slower.

The first quarter of 2001 saw a big sell off in ICT stocks and even other big and small cap stocks were hit by the sell off.

What will the year deliver to the stock market, as with stocks there is no certainty, and everything might be possible. But we could eventually make a forecast over investing in the stock market.

The economy

The value of the stock market is essentially a reflection of the expected development of the economy in general and the businesses operating in it specifically. The value of the companies is based on the future expectations of a company of what they are most likely to return on the investments, in short the sales, revenues and profits generated by the companies.

After several years of growth, the US economy and several other western economies have achieved growth rates of 3 % to 5 % annually for a couple of years in a row. Even the Asian economies could recover somewhat after the Asian financial and economic crisis of 1997. This growth translated into very positive balance sheets of the majority of the companies in the world, especially in the US and Europe. The ICT boom did its part to the growth.

The economic slow down in the US did lead to a negative trend throughout the world. Economic growth figures had to be adjusted downwards and instead of the nice 3% to 5 % growth, growth will be limited to a meager 2% to 3 % growth annually. The companies in turn could deliver growth rates of 15 % to 20+ % annually, and now they will only be able to deliver a growth of 5% to 10% annually. The spoiled investors have become somewhat dissatisfied with those limited growth figures. The earnings warnings of a number of bigcap and especially the ICT sector created a feeling of dissatisfaction in the stock trading community.

The insecurity in the stock trading community did become more pervasive by the big interest rate cut of the US Federal Reserve this led to speculations that the US economy was in a much worser state then anticipated. But the cut led to a rally on the stock markets of the world as it did give a positive signal.

The quarter results of the big caps were on the other hand better then expected or in line with expectations only a minority did not meet the expectations.

The US and the European economies are not growing that fast as in the previous period, there is a slow down. But it is still uncertain of the level of slower growth. This uncertainty of the economic growth is suppressing the growth of the stock market.

The slow down will most likely be smaller and shorter than anticipated, we expect a turnaround in the stock market in about 6 months. The economies of especially Europe will also show a good improvement in about 9 to 12 months. The US economy will return to a stable growth of 3-3,5% within 12 to 18 months. There is still a lot of potential in the western world which will be used on the medium term. The US economy may show some better figures than expected as the consumer demand might pick up. The durable goods orders and the homesales proved to be much better than expected.

Europe might have a slight advantage over the US as they have been lesser touched by the fall of the ICT stocks and have not experienced the boom which happened in the US in the nineties. There is still a large demand in Europe which will need to be satisfied. Thus an opportunity for growth in Europe, especially if the US slow down is lesser and shorter as first has been anticipated.

Asia and the emerging markets are of no big help for the stock markets or the US or European economies. They have still problems of their own and are highly dependqent on the growth of their economies on the well being of the western world.

The stock markets

In this assessment we will limit ourselve to the US and European stock markets as they are the most important and essentially the most secure to invest and have the best chance to deliver the best returns.

The stock markets are because of the slower growth of the economy very volatile and without any clear direction. The US slowdown even as it was expected hitted the market harder then was anticipated. The market expected a gradual slow down but when the first signs were worser than they anticipated they sold off large parts of their investments. Even if the signs were largely incorrect with the exception of some ICT stocks. These bad stocks took the whole market with them in their fall.

The market is thereby a victim of the wide difference in the expectations of the majority of the analysts on many companies. This does not give the market any direction, or the companies are performing good to very good or they are listed as bad performers and a candidate for the sell list. The largest disadvantage is that the companies are not belonging to one or two sectors but all kind of sectors and all kind of scales are involved. Small ICT start ups are in the same group as multinational multi-billion corporations. The ICT companies take the lead but as all sectors are present are in the group there is no direction, what so kind, in which sector to invest or to avoid.

The US interest cut of the Federal Reserve, Fed, should have been a support to the market, as it did in the beginning. But the analysts started to doubt the decision as they now suspected that the US economy was in a much worser shape than was anticipated by them.

The availability of cheaper money should support the market as it will probably do but on the short term it increased the insecurity in the market. The suspicious minds of the analysts might suppress the market with their doubts.

These three conditions made the market go up and down without any clear direction. This will continue for some time as the market will have to find itself and the strength to come back from the negative information. The market needs to bottom and need to find the strength to bounce back and show growth for some consecutive days or even weeks before the trust in the market will return.

The strenght of the markets is further undermined by the increased poitical tensions in the world. The relations between China and the US have deteriorated by the spy plane incident and the planned weapon deliveries to Taiwan. The Middle East has also become less reliable for the US and the world in general. The tensions between Israel en its neighbors and especially the Palestinian people have increased. Peace, stability and economic progress seem farther away than before in the Middle East.

These tensions and several other smaller and bigger and close by and remote conflicts have a bad influence on the strength of the stock markets in the world.

A volatile stock market will be around for some time. It will take at least a quarter to a half year before the market will find some direction. And up to six to nine months before the market can gain a positive direction upwards. The exception, as always, are the unexpected good consumer numbers which could create a summer rally. And amking the transition towards a positive direction faster and smoother.

In the mean time the stock markets will show a relatively sharp upward and downward movements with in the end possibly remaining flat. But the market will not have a big decline in value. The markets will have a more side way direction because of the lack of direction, indecisiveness, and the suspicious minds..

This year is therefore partly an example of sell in May and go away. The market will most likely not show any big growth this summer, with the exception of the above mentioned summer rally, but on the other hand it will present some opportunities to buy stocks at a very cheap price. This summer will most likely see the bottom of the prices of stock. An opportunity of one’s in lifetime.

Investment strategy

The best course for the future will be to hold on to the majority of the existing portfolio and prepare to enter the market on the low. This period will deliver an unique opportunity to buy some stocks at very competitive prices. There are still a large number of technology, ICT, stocks which hold much for the future. And there are a numer of other companies which were simply pulled down with the ICT sell off and are also at available at very attractive prices.

The market will not grow as quick as in the previous years but within a time frame of one to two years the ICT sector will belong again to the most promising stocks of the market. And long before that time the other stocks will have made good much of the losses incurred in the prevous months.

The division of a model portfolio, always dependent on your time horizon and your acceptance of risk, for a long time stock investor should consist out 75% stocks, 10% bonds and 10% property and 5% cash. The stock allocation should for example be balanced between the European and US stock markets with a bit more attention to the European markets. A small percentage should be allocated to the Asian tiger markets and the emerging markets. We could envisage the following allocation 35% in the European markets, 30% in the US market, 5% in the Asian tiger markets and another 5% in the emerging markets.

This stock allocation will benefit from the increases of the western markets after the recent decline and at the same time position yourself for the promising developments of the much talked about Asian century.

There are two ways to invest your money, the easiest way is to invest in mutual funds with a region or sector allocation. This is a safe way to invest without having the need to follow the markets every day. It is also possible with smaller amounts of money to enjoy the advantages of a wide spread portfolio.

Secondly, is to invest into stocks directly, which will need a better understanding of the market and a larger amount of money to make it feasible and worthwhile.

The US portfolio

The US stock market offers numerous opportunities, even as the market analysts are suspicious and does therefore not look that promising on the short term. Especially the ICT sector will face a rather difficult year. On the medium term the US economy will stabilise and the slow down will most probably will be a soft landing. The markets will react positively on this and the prospects for the future look good.

We continue to expect a good performance from the oil and energy sector. We like companies like Exxon, Royal Dutch/Shell, British Petroleum but also the oil service/offshore companies like Schlumberger, Halliburton, Baker/Hughes and Diamond Offshore.

The pharmaceutical sector also will remain an above average player, we like in this sector Pfizer, Merck, Johnson&Johnson, Bristol-Myers-Squib and Schering Plough. Beside the pharmaceuticals we like the HMO sector as they will get better returns every year. Here we like Caremark, Community Health, Health Management, Trigon Healthcare, Omnicare, United Health Group and Universal Health Services.

The closely related Biotechnology sector will make a return to the better performing stocks. Here we like companies like, Biogen, Biomet, Curagen and InvitroGen.

The financial/insurance sector will remain one of the better performers on the stock market. Companies like Citigroup, American Express, J.P. Morgan, State Street, AIG, Providian Financial, American General, Fleet/Boston financial, Freddie Mac, Fannie Mae and Allstate will most probably belong to the winners in this sector. But also large trading houses like Merril Lynch and Goldman Sachs will do allright.

The defense sector is finally coming out of the problems from the restructuring and the lower expenditures. The large companies with big stakes in the digitization and advanced technologies will deliver the best performance. Companies like Boeing, Lockeed, Northrop Grumman and General Dynamics will do very well.

Other companies we like are General Electric. Ford and Ballard Power Systems.

In the more defensive kind of companies we like the food and beverage sector with Heinz, Sara Lee and Pepsico, in the utlities sector we like Colonial Gas, Duke energy, AES and Eastern Utilities. But also consumer companies like Procter and Gamble and Gilette. And finally companies like Safeway and Walmart.

The ICT sector is another ball game were the first group promise a better performance within 6 months, the ICT sector will need 9 to 18 months to recover from the slump in sales, revenues and profits. On the long term ICT is one of the most promising sectors as the product package on offer and in the pipiline is very promising.

The following companies are likely to recover from the current situation and regain the strength they used to have. We like companies like Dell, Sun, Palm, HP, Texas Instruments, Intel, AMD, Applied Materials, Xilink, Microsoft, Oracle, Peoplesoft, Adobe, Red Hat, Linux VA, Cisco Systems, CSC, CA, Wind River Systems, Juniper, Sycamore, IBM, Ebay and Amazon.

In the telecomunication sector we like companies like Nokia, Qwest, BellAtlantic, Vodafone and SBC.

The European portfolio

The European market is much more fragmented than the US market. Every country has its own exchange and even wit the increased cooperation between the exchanges it is much more difficult to trade on all.

The economy and stock markets of Europe have not been through the same kind of booming period. The European bourses were thus also less hit by the sell off of the last months. But to be fair the economies of the European countries were also less succesfull. This will probably change on the short to medium term. The European economies should be able to increase their growth to a stable and enduring 3% a year,

In the financial sector we like BBV Argentaria, Deutsche Bank, Commerz Bank, Society Generale, BNP, Fortis, ABN-AMRO, ING, Royal Bank of Scotland, HSBC, Lloyds TSB, Banca Intesa, Banca di Roma and Mediobanca.

In the insurance group we like Allianz, Muencher Ruck, Zurich Group, Generali Ass. and Prudential.

The oil/energy group will also continue to perform very well, here we like companies like Royal Dutch/Shell, BP Amoco, Enterpise oil, TotalFina/Elf, and E.on.

The ICT sector also has some companies which could deliver some nice returns on the medium to long term. Here we like companies like Alcatel, Cap Gemini, Siemens, Infineon, SAP, Nokia, Logica, Sage and Invensys.

In the communication sector we like British Telecom, France Telecom, Deutsche Telekom, KPN/Qwest and Tiscali.

The pharmaceutical sector remains a growth sector with companies like Bayer, Roche, Astra-Zeneca and Glaxo-SmithKline.

In the defensive sector we like the food and beverage sector, with companies like Nestle, Numico, Danone, Diageo, Cadbury Schweppes and Unilever.

In the automotive industrial sector we like Daimler-Chrysler, BMW, Buderus, MAN, Mannesman, Peugeot, ABB, Sulzer and Rolls Royce.

And finally companies like Sanofi-Synthelabo and LMVH and Vivendi.

Standaard
August 1998

August 1998

August 1998

Is the bull getting tired? – Conflicts turning violent

Is the bull getting tired?

The Asian crisis turned all emerging markets, Russia and South America, moving south. Currencies got under pressure and markets disappeared. The solution of the Asian crisis is largely dependent on the economic recovery of Japan. And as long as Japan is not seriously solving their economic problems, clean up the bad loans, restructure their financial system, eliminate the connections between business, government and crime and restore confidence into the government, Asia and the other emerging markets will not be able to stem the tide.

The European and U.S. economies on the other hand are doing allright. The Asian crisis forestalled the threatening ghost of inflation in the booming U.S. and the recovering Europe. The stock markets on the old and new continent have reached in the mean time new records. The Dow broke the 9300, the Dax the 6000 and also the smaller markets like the Dutch AEX broke trough the 1300 level.

How long can the Western markets continue this growth? If Asia would return to their former might everything would be OK but this will take another two or three years at least. The growth of the western markets has also to be carried by the home markets and the markets in Eastern Europe which are less influenced by Asia then the other emerging markets. The economic fundamentals are thereby not that bad for the majority of the companies but there are a number of buts which could have a negative effect on the development of the stock market.

One of those buts is the price/earnings ratio. The market valuation is becoming very expensive. The Standard and Poor 500 index is traded at 20 times earnings, the best performers of the S&P even 35 times earnings and the profit expectations for 1999 are just a mere 1,5 till 1,9 %. The weak position of the U.S. stock market becomes more clear by a look on the advance-decline line of a combination of the NYSE and the Nasdaq, it is dropping. There are reported fewer new highs but more new lows. The booming stock markets are builded on the just a few strong stocks, the breadth is very small. And finally money is moving out ot the stock market and into the money and bond market.

The European valuation situation is not yet that worse as in the U.S. but the earning forecasts are just as disappointing as in the U.S. Disappointing is not the right word, they just not that impressive as before. The economic performance in especially the manufacturing sector will deliver single digit growth where as the financial, telecommunication and some tech stocks are however still able to deliver double digit growth. This small breadth of high performing stocks will disappoint the analysts and the investors.

This will result in a lost of trust in the strenght of the market. A lot of people will take profits and wait to re-enter the market at a better price. And more dangerously the stock community will react very harshly on most of the earnings warnings which might be given by companies. Consequently there will be some ups and downs but the year to date growth will remain positive for the quality stocks.

The earnings growth of several companies will be less then in the preceding years and this will limit the growth of the market. The volatility of the stock market will continue till the end the year. It can be described as a slow down but to call it the beginning of the bear cycle might be a little premature. The overall economic position is still to positive. The economic outlook on the world economy for 1999 is despite the Asian crisis promising, especially the U.S. and European economies are responsible for the well being of the economy. The last quarter of 1998 or the first quarter of 1999 will show some improvement to the market. The earnings situation will get better at that time. The improved market/economy with a cheaper stock price because of the slow-down/correction will improve the valuations and this will boost further growth in 1999. The bull will continue in 1999, it is only taking a little break in the second half of 1998.

The third quarter and possibly the fourth quarter will bring some volatility. This could include a correction of 10-15 %. This will not have a lasting impact. But if you want to be on the save side and have good night sleep you could consider to protect the profits you have gained till now by the use of a put-call option combination. This will protect you to any losses and it will keep your portfolio unimpaired. This can be done at little cost because the majority of the costs will be covered by the earnings of the put. This little exciting operation will protect your holdings but will limit the growth chances of the second part of 1998, there are however some more exotic derivative combinations which could increase your gains even more. But this is attached with a higher risk.

Conflicts turning violent

The world in 1998 is still not a peacefull place. There are several regions where people, organisations, groups, religions and sometimes even states have differences with eachother. Some of those problems can be solved by mediation but some will use violence as a way to improve their position. In Kosovo most of the above mentioned differences are present , included the preferred way to solve it.

Kosovo, bushfire or war

The conflict in Kosovo gets worser by the time. Both groups, the Kosovo-Albanians and the Serbian security forces increase the use of violence towards eachother but also against the civilian population.

The Serbs and the Albanians are getting far away from a diplomatic solution. The demands of both sides essentially rules out a diplomatic solution. The Serbians want to keep Kosovo part of Yugoslavia with no special position. The Albanians are insisting on independence or a possible link up with Albania proper and a part of Macedonia to create a Greater Albania.

The major party which represents the Albanians have become the UCK/KLA who have more or less controlled a large part of Kosovo before the Serbian/Yugoslav forces started their operations. The military power of the UCK/KLA is limited. The numbers are relatively small and the armament beside the personal arms of the fighters is limited to heavy machine guns, mortars and grenade launchers including AT systems. This is enough to carry out a querrilla war but it is not enough to impress or defeat the Serbian security forces. Especially, what is the case, when they receive support from the Yugoslav army. The Yugoslav army will be the decisive factor. They can deliver the necessary military weight, MBTs, artillery and manpower to destroy the UCK/KLA military power. But they could, in the end, also force the Serbians politicians to accept a diplomatic solution. The Yugoslav army are not loyal supporters of Serbian president Milosevic and his policy. This could mean a chance for a diplomatic solution. But in the beginning they will support Milosevic to destroy the UCK/KLA because they pose a danger to the integrity of Yugoslavia. A strong UCK/KLA can not be tolerated by the army but a less threatening querilla force could be an acceptable negotiation partner.

The intensified fighting between the UCK/Albanians and the Serbian/Yugoslav forces pushed the former in the defensive. The Serbian military operations to regain control over the important roads between Pristina and Prizren and between Pristina and Pec proved to be a dangerous development for the UCK/KLA. Because the Serbians already controlled the border with Albania, incidentally they even followed the UCK/KLA into Albania and clashed with the Albanian border troops, the UCK/KLA got trapped in its hide out around the town of Malisevo. Malisevo is the HQ of the UCK/KLA and it is situated in the centre of the triangle Pristina-Pec-Prizren. And the line Prizren-Pec is about 10 KM of the border which is under control of the Serbian security forces. The intensed fighting in the triangle led to loss of the UCK/KLA HQ and this was a bad development. They not only lost a clear sign of their power but they also lost morally. They are not that strong as was thought and they are also not able to protect the Kosovo-Albanians from the Serbian terror. It was essentially the end of a myth.

The fighting will be in the advantage of Serbia. The military fortunes of the UCK/KLA are bad. They are pushed back by the Serbian/Yugoslav forces and they will be finished as conventional force very quickly. After that they will only be able to operate as a querilla force. The situation is further deteriorated by the fact that the logistic support of the UCK/KLA has become very difficult because the Serbian security forces control and “evacuated” the border territory with Albania. The Serbian forces are thereby willing to eliminate the Albanian support of the UCK/KLA in Albania proper. They have moved into Albania and destroyed UCK/KLA forces over there.

Time will be advantageous to the Serbian forces. The resistance of the UCK/KLA will be further undermined by the coming winter which is very harsh in those regions. The many displaced persons who fled because of the agression can be of no help to the UCK/KLA in their resistance. The resulted uninhabited villages can not be used as a hide out for the UCK/KLA. And local support is necessary in a querilla war.

The position of the UCK/KLA is finally undermined by their own policy to try to get the support of all Albanians in the region and their insistence on maximum demands. The UCK/KLA has become a powerfull force in the area and they try to rally support not only from the Albanians in Kosovo but also in Macedonia and Albania proper. This could draw three countries into Kosovo-conflict. Albania might like the idea of a greater Albania even if it would create a ungovernable country and that it is not clear who will run the country. The other involved entities, Yugoslavia, Macedonia and the international community, would however fundamentally oppose such a development.

The military operations in Kosovo has forced the UCK/KLA in the defensive. They had to give up the limited/conditional control they possessed over some areas. They are hard pressed because of the operations of the Serbian/Yugoslav forces. They even called for intervention by the international community. The UCK/KLA might be tempted to use a possible cease fire to regroup and reinforce their positions and try to save what is possible.

The demand for international intervention might be to late. The military operations in Kosovo might soon be over as the military power of the UCK/KLA is broken. The Serbian security forces can handle the querilla threat by the Kosovo-Albanians on their own with the usual terror. The political position of the Kosovo-Albanians will then be weaker then before and a low-level querilla war will be the only mean of resistance leftover.

The Serbian leaders will feel encouraged by the demand for international intervention because that is the evidence that they are stronger and can solve the Kosovo problem their way. The silence of the international community during the recent military operations will also give Milosevic the idea that the West does not object to the steps taken to keep Kosovo within Yugoslavia.

To prevent a forced military solution by the Serbians the UCK/KLA and other political organisations in Kosovo like the LDK should unite and work together. With one strong voice they should then try to get as much as international support as possible. If they at the same time are willing to accept a compromise solution of autonomy within the state Yugoslavia it could be feasible to reach it. The international community could press Milosevic to accept that compromise especially now the Yugoslav army has been involved into the conflict.

The psychology of the people in the region however encourages the choice of maximum demands and any compromise is a sign of weakness. Their thinking is black and white. You win or loose and something in between is not possible. If the Kosovo-Albanians let traditional feelings run their policy they will loose.

The Kosovo conflict will be a limited conflict. The threatened new Balkan war is very unlikely. The UCK/KLA is to small, politically and militarily, to really influence the outcome of the conflict. The Albanians in the region are thereby not in a position to create a Great Albania. They have to many internal differences and they are simply to poor. The neighbouring states have intrests in the region but they have little in common with wishes of the Albanians and they are certainly not willing to die for Pristina or a Great Albania.

 

Standaard