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Monthly commentary – November 2011

By November 2, 2011No Comments

SUMMARY The outcome of eurozone summit last week was merely disappointing rather than apocalyptic. Markets bounced strongly. But don’t hold your breath, it’s already unravelling.

October was a fascinating month. A bounce of 18% in the UK stock market from the August lows*.  Why?

The outcome of the Eurozone summit was merely disappointing rather than apocalyptic. The “grand plan” was a whole load of words reflecting a middling version of what had already been discussed in prior weeks.

The EFSF (the fund to bailout the bust peripheral economies) will now be measured in trillions rather than billions.  But the problem is that just when the resources of the enlarged EFSF might be called upon is precisely when the contributors are least likely to be able to assist. But let’s go back a step – who is going to fund the new enlarged EFSF? No one yet knows.

They announced a 50% haircut of Greek debt.   To you and I that sounds like they can’t meet their obligations, which is what is called a default.  But the eurozone leaders said this was a voluntary agreement with those banks holding this Greek debt.  If it is voluntary it means that the banks can’t claim on insurance-type contracts they hold (called CDSs), which pay out on a default. 

Net result? The institutions whom might ordinarily buy the eurozone’s sovereign debt (government bonds) are much less likely to do so.  This is because they can’t effectively cover off the default risks as the ECB and eurozone leaders keep trying to rig the markets.  And the consequences were seen only yesterday when Italian bonds were offered for sale, and there was a buyers strike – remember this was Italy, the third biggest eurozone nation, not Greece.

Also yesterday the Greek PM shocked the rest of Europe by back tracking on last week’s deal, and announcing a referendum. Given less coverage was the military Top Brass being sacked in Greece. General Paranoia?

Midst this pickle Morgan Stanley were running a slide rule over France, measuring just how close they are to the edge? MS anticipate just 0.9% GDP growth in 2012 (the French government had hoped for 1.75% not long ago) with the main risk being that it could be somewhat worse. 

And this is the second biggest eurozone nation. How far can they commit to the trillion euro EFSF? No wonder the begging bowl has been pushed out to emerging markets.

Yet while the focus has been on Europe (it feels like for perpetuity) there was positive news from both India and China.  Both nations might be at the end of their monetary tightening cycles – put another way they might be close to the point of cutting interest rates and reinvigorating their economies.

With emerging markets generating the lion’s share of global economic growth for some years past, the performance of many businesses linked to these economies could receive a significant boost.  Midst the gloom this is where the best opportunities might arise, and these businesses are based all around the globe including the UK and Europe.  And the eurozone chaos is pushing prices towards more attractive levels.  Chaos creates opportunities.

*though, as you will have spotted in the headlines yesterday and today, this has already begun to unravel

Dennehy Wealth