Eurozone

James Mackintosh

Some interesting charts from Credit Suisse this morning are testing the idea that eurozone unemployment looks particularly awful.

Adjust for the rising number of people participating in the workforce in the eurozone, and the falling number willing to work in the US, and unemployment is just about the same in both. Read more

James Mackintosh

Old stock market wisdom has it that as goes January, so goes the year. As with “sell in May”, “run your winners” and so many others, there is some truth in the saying: in 62 of the last 85 years the US market has moved the same direction in January as in the full year ahead.

On the other hand, the first day of trade is irrelevant, as Howard Silverblatt at S&P Dow Jones Indices points out. Read more

James Mackintosh

When the European Central Bank governing council meets on Thursday in Frankfurt, sushi is unlikely to be on the menu. But officials should have a concern: is the eurozone turning Japanese?

This chart shows headline inflation (in Japan the measure excludes fresh food) for Japan since its bubble turned to bust in 1990, heralding a slide into deflation. Radical action by its central bank is just beginning to return price rises, as the far right hand side shows. Read more

James Mackintosh

Money has been piling into European shares as fears of the euro imploding recede, the economy shows signs of life and investors look for the next trade after Japan.

But the “eurozone shares are cheap” theme might have run its course. This chart shows the discount of eurozone forward price-to-earnings compared to the US, as a percentage (using MSCI indices). Read more

John Authers

Can CAPE guide us around the world? One reasonable complaint during the last week’s debate on cyclically adjusted price/earnings multiples is that the discussion is too US-centric. There are reasons for this. The US is still by far the world’s biggest stock market, the data are more reliable and go back further, and most of the academic players in the debate are based in the US. But it is still a reasonable complaint.

Here then are the results of the exercise in using multiples of 10-year rolling average earnings to value a range of world markets, as carried out by Mebane Faber of Cambria Investment Management, who kindly gave me his data. One huge caveat is that the data do not go as far back as for the US (although this at least means that we do not need to have arguments about whether it is possible to make comparisons with earnings from the late 19th century). The Faber data for the UK go back to 1927; none of the others go back further than 1969; and for some of the emerging markets the data only go back to the 1990s. The full details can be found on this post, and Mr Faber provided me with updated results to the end of July this year. Read more

John Authers

The fun part of the eurozone crisis, if there is one, is that you never know where to look. After the Cyprus crisis three months ago, the hunt was on for the next small peripheral country that would create a headache. Slovenia was a popular bet. So, among some hedge fund managers, was the Netherlands, where house prices are dropping alarmingly. There was a frisson of concern about Croatia’s accession to the EU. But it turns out that the next country to administer a shock, two years on from its bail-out, is Portugal.

You do not need to be an expert in Portuguese politics to see that the country is in a crisis, or that local markets were shocked by developments. When the foreign minister hands in a resignation hours after the finance minister has done the same thing, over an issue of core economic policy, and the existence of a fragile coalition is called into question, then it is natural that prices will be revised. Read more

James Mackintosh

Ooh la la! French consumer confidence figures just came in, and they aren’t pretty. The index just matched its lows from late 2008, itself the lowest ever.

So far, so eurozone. It isn’t exactly new news that the French economy is in terrible shape. But this chart shows how consumer confidence has broken away from share prices, something it usually tracks closely. Read more

James Mackintosh

There’s been quite a bit of excitement about the Dax hitting a record high this week, with the Wall Street Journal even splashing its European edition on it. The chart looks impressive:

Dax 30 Read more

James Mackintosh

Markets aren’t known for their patriotic fervour. Populated by cynics and motivated by money, there is little reason to expect local markets to support their national governments – particularly in the eurozone, where the response by the wealthy in crisis-hit countries has been to ship their cash to Germany or the UK.

But hang on! Perhaps brokers are more patriotic than popularly thought: it turns out that analysts tend to recommend shares in companies from their countries.

A nice piece of work by Charles de Boissezon at Société Générales global equity engineering and advisory unit looked at broker recommendations on German and Spanish blue-chips, the two markets tending to be reasonably domestically-exposed.

Not surprisingly there are more buy recommendations on German than Spanish shares, and more sells on Spanish.

But the breakdown is revealing: analysts at German brokers are much more positive about German companies than analysts working for Spanish brokers, and vice-versa:

Broker recommendations by country Read more

James Mackintosh

Cyprus has finally struck a €10bn deal to become the fifth country “rescued” by the rest of the eurozone, after Greece, Ireland, Portugal and a special loan for Spain. Almost a third of the 17 countries in the single currency have now had to be rescued.

Unlike all the other deals, Cyprus gets immediate deflation, through heavy losses for depositors above €100,000 at its two biggest banks, Bank of Cyprus and Laiki. Read more

The European Central Bank – like the Bank of England – has decided against an immediate further loosening of monetary policy, but Mario Draghi, president, says some ECB policymakers favour cutting interest rates. Ralph Atkins, the FT’s capital markets editor, argues that with small businesses in the eurozone’s south facing a severe credit crunch and the stronger euro hitting eurozone exports, further action from the ECB may soon prove inevitable.

John Authers

Today sees the publication of Credit Suisse’s annual Global Investment Returns Yearbook, a mammoth piece of research into global long-run returns overseen by the London Business School academics Elroy Dimson, Paul Marsh and Mike Staunton. It is an invaluable resource, and this blog is likely to mine its contents for some days to come.

Revisions for this year help ram home one quick and spectacular lesson from history. Baron Nathan Rothschild is widely believed (wrongly, according to historian Niall Ferguson) to have said that you should “buy when there’s blood in the streets”.

Much of the time this advice works. Buying into Japan or Germany after the second world war would have worked out extremely well, and the greatest buying opportunities almost by definition come when it seems almost mad to buy.

But the aphorism is not infallible. This year, the academics tried to address their concern that their global stock market index suffered from “survivorship bias”. So they have recalculated them including three new countries that were not previously covered in their attempts to calculated the global equity risk premium: China, Russia and Austria. Adding these nations hugely changes the perception of long-term risk.

Let’s start in Russia. Any bold contrarians who decided in the late 19th century to bet on Tsarist Russia to outperform the US for the long-term, and held on even during the great political unrest of the attempted revolution of 1905, would for a long time have looked very clever.

The chart compares the St Petersburg stock exchange’s composite index performance with that of New York. After 1917, of course, the value of any equity investment in Russia was wiped out. This might appear to be an exceptional example. But it is not. China also had a revolution that led to the closing down of its stock market (and of capitalism for a while), and that happened within living memory. On the eve of the second world war, China’s returns looked very healthy. With the arrival of Mao, shares went to zero (and international investors have had a rough ride even since Chinese stock markets reopened).

Using the MSCI China index, covering stocks available to international investors, those who bought in 1993 have actually lost money. But Chinese stock markets have been recovering recently. And, deliciously for those who like historical ironies, the Shanghai Composite, the main domestic index, bottomed last year at 1949, the year of the revolution. Read more

Calm in the eurozone has come at a cost to the havens. James Mackintosh, investment editor, points to the sliding Swiss franc and sterling, and warns the premier haven of choice, London property, could be next.

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The parade of best bourses so far this year is a rogue’s gallery of the past few years’ basket cases: Greece, Dubai, Egypt and Argentina, with the eurozone periphery close behind. James Mackintosh, investment editor, analyses whether this dash for trash is wise.

The valuation gap between European and US shares has narrowed to levels only seen a few times in the past decade. Is this justified? James Mackintosh, investment editor, says this suggests investors see a safer Europe while America’s economy turns European.

There are signs of green shoots in the Greek current account, recording a September surplus for the first time since it joined the euro. But James Mackintosh, investment editor, worries that Greece is getting the wrong sort of rebalancing

James Mackintosh

If you only know one thing about European summits, it should be this: agreements aren’t worth the paper they’re written on. The fact something has been publicly announced, even written down in 4am post-summit communiques, means nothing.

Yet another European summit has been discussing yet another urgent issue, and yet again it is one that was supposed to have been agreed at a previous summit: banking union. The wrangling this time extends as far as the question of whether what was previously agreed is even legal.

Once again the deal was struck in the early hours of the morning, and once again Europe’s leaders hailed it a successRead more

James Mackintosh

Lee Buchheit is a man worth listening to. The Cleary Gottlieb lawyer wiped €100bn off Greece’s debts when he restructured the country’s bonds at the expense of the private sector, in just the latest in a long line of sovereign defaults he has overseen.

Now he’s airing his thoughts on the options for Spain and Italy, jointly with Mitu Gulati of Duke Law School – and rather bravely, he’s due to speak about it in Portugal next week.

His key message is that Spain is running on borrowed time, and should get on with a Uruguay-style debt reprofiling as soon as possible, extending maturity dates on bonds far into the future but continuing to pay interest. Read more

James Mackintosh

Even after the extraordinary summer rally in European equities, strategists continue to punt European shares as cheap, and so worth buying. Unfortunately, it’s more complicated than that.

The sell-side analysts pushing the idea are too numerous to list, but one of the better argued cases is that presented by the cyclically-adjusted price-earnings ratio (CAPE), which averages profits over 10 years in an attempt to eliminate the effects of the economic cycle.

Paul Jackson at Societe Generale has some nice charts showing Europe looks cheap, and demonstrating the use of one derivative of CAPE, the cyclically-adjusted dividend yield.

CAPE vs its average Read more