One of the (many) reasons why value stocks haven’t done so well in recent years, is that a large number of these cheap stocks are located in unpopular markets that have – in relative terms – been left behind by the great bull rally over the last decade (and last few weeks).
Europe in particular has a whole mountain range of cheap value stocks and investors have failed to find much reason to re-evaluate these stocks. Where’s the catalyst for change? Obviously weak consumer demand and worries about governance (in places such as Italy) are factors but lurking in the background is a more basic, long term concern. Although the Euro will probably survive, investors are worried that the tight monetary regime is not matched by a sensible fiscal policy framework. Put simply, much of peripheral Europe has been left to fester in order to strengthen a strong inner core of Germany and North Europeans.
The new EU recovery fund by contrast is a notable attempt to address these concerns. It’s probably not quite what is entirely needed – much closer fiscal union – but in a continent used to half steps, it’s a real start, and one to be commended. At the very least Macron and Merkel have risen to he challenge and proposed something that might help the weaker (economically) peripheral nations (and France).
This change might also act as a catalyst for a re-evaluation of local European equities. If investors begin to believe that the Euro zone is serious about change and reform, we could see a substantial, positive change in sentiment towards cheap local shares. That in turn could really help the more peripheral nations, especially on the Mediterranean fringe.
Or that at least is the conclusion of a report out this week from the European equities team at Morgan Stanley. They think the Recovery Fund is a “ a very significant moment for the Eurozone and its asset markets. Subsequent commentary from the European Commission gives us further confidence that the Fund will be launched as (broadly) proposed.”.
These changes should lower the risk premia which might in turn help undermine the structural bear case for Eurozone assets. That in turn will help those countries and sectors most vulnerable to this risk premia concern.
In equity sector terms that lower risk premia will help Financials and Commodities over Defensives (especially Staples & Healthcare).
And of course value stocks !
Morgan Stanley’s favoured overweight stocks include: Applus, Santander, CaixaBank , Cellnex Telecom, EDP Renovaveis, EDP, Enel, Ferrovial, MasMovil, Mediobanca, Merlin Properties, Moncler, Prysmian, and UniCredit.
ISAs and Investment Trusts
Coredata recently released their ISA report based on a survey of 370 UK retail investors carried out in March . Some interesting tit bits in this report, headlined by the two key findings:
- 40% of Stocks & Shares ISA savers have investment trusts. Investment trusts are particularly popular with the Silent Generation (57%) [ these are people born between 1928 and 1945] and non-advised investors (47%).
- Nearly a third (30%) of Stocks & Shares ISA investors hold index funds or ETFs. Millennials (58%) are particularly keen on index funds or ETFs.
Corona Virus in the developing world
As many of us have feared all along, the corona virus is now cutting a swathe through some – though not all – of the developing world.
Latin America and Brazil in particular seems to be the current focus, but I can’t help but think MENA might be next.
Charlie Robertson chief economist at Renaissance Capital keeps a close eye on these developments and his latest email update from yesterday contains some grim news.
Robertson thinks we shouldn’t be too surprised when case numbers rise ‘very significantly in Egypt, Nigeria, Pakistan and India. I’d expect them all to be on the top chart for active cases in the next month (probably) or two (max). Also, Zambia’s cases data supports the thesis that age is going to help minimise deaths rates in SSA.
29 May saw Bangladesh, India and Egypt with record numbers of new cases
30 May saw Egypt, India, Nigeria and Pakistan with record new highs
31 May saw Bangladesh, India and Egypt with record new highs
So, this is all unfolding as expected. It is worth watching Egypt as they had said in early April that over 1,000 cases might justify lockdown but if I had to guess, they won’t do a European style lockdown.”