First my short, sharp observation on Carillion. I can’t say I’m surprised. As I have already said, I think the wheels are coming off the out-sourcing boom. Government’s are becoming more prescriptive about outcomes, and the cost base is rising inexorably as we become a more regulated society – think Living Wage and suchlike. I think we’ll see this unfortunate meltdown as the high water of the outsourcing boom. The smart people will now be thinking about comes after the Outsourcing Model 1.0. It’s clear that balance sheet derisking and using private contractors to cut opex costs is a challenged model. Many on the Left are arguing for taking these contracts back in house but I think that’s a recipe for disaster. Network Rail is a classic example – it’s hardly a shining light of cost control and efficient delivery. The old debate between private and public is increasing besides the point. New models are needed.
I also think the Carillion affair will also cast a shadow over the infrastructure funds – from what I’ve heard outfits like HICL had some, controlled, exposure to the contractor. I don’t see any long-term issues as the funds will have a backup but I do see a direct knock impact on those eye-watering premiums for the funds. Yet more uncertainty around operational risk is now exposed which leaves one questioning those premium ratings.
Anyway, on a positive note, the good news keeps bubbling out of the Eurozone, mostly thanks to the much put-upon consumer – who have been helped by improving job prospects. A note out today from analysts at SocGen I think highlights a clever basket of stocks which should benefit from this positive trend. The idea is back those large caps with heavy exposure to the Eurozone domestic consumer upswing. The bank’s analysts note that “a higher euro is supportive of eurozone consumer’s purchasing power, while a better economy has brought down the unemployment rate to a 9 year low, at 8.7%. The eurozone consumer confidence indicator has improved sharply over the last year, back to a 17 year high at 0.5. “. The basket of stocks comprises 17 European stocks in the consumer sector. It’s been around for a while now and has “delivered 2.8% ytd, versus 2.4% for the Stoxx 600”. In valuation terms the basket is trading at a 14.6x trailing P/E, versus 21.4x for the Stoxx 600.