Underneath The Surface
Pfäffikon SZ, Switzerland – Despite the apparent tranquility, considerable activity is taking place underneath the surface in the financial markets this week. Last Friday, I noted that I had not yet observed cracks in the current bull market, but this week my view is changing moderately, in a negative manner. There is no reason yet to panic. It is striking that certain indices are slowly sinking through the ice. Mainly the small and midcaps are suffering, whereby some businesses are being punished ruthlessly.
Over Sensitive
That investors are over sensitive became apparent when Portuguese bank – Banco Espirito Santo – came out with heavy losses. Less well known is perhaps the recent downturn for Austrian Erste Group Bank AG. European financial values are deservedly under heavy pressure. Despite politicians clamoring in unison that the past financial crisis has been tamed and dealt with, the facts tell us a different story. The financial health of Europe is fragile, which makes it susceptible to the ignition of an old fashioned banking crisis. It’s not without reason that as a general rule I have been avoiding financial stocks over the past several years. Globally, I have only been able to find two that satisfy our criteria. Only one of which has been added to our portfolio, to our complete satisfaction.
France
At the end of last year, I expressed my concerns about France and as it seems, not unwarranted. The French economy is going through deep lows and has become one of the weakest brethren of Europe, courtesy of Monsieur le Président Hollande. Unemployment in France is sky high and recent figures on the industrial production are, to say the least, disappointing. The key question is when the first French bank gets into trouble. It’s clear that Mario Draghi from the ECB has his work cut out for him in terms of bringing the EU to safer waters. The socially tinted Christian-Democrat Jean-Claude Juncker will have his hands full as president of the union to bring Europe forward. It’s possible that his tact and skills will be put to the test shortly, with France as problem child.
Stretched Valuations
It will not have escaped your attention that the Fed has slowly begun to say farewell to its generous money policy. Broadly speaking, this means that investors will have to stand on their own feet. It’s for this reason that “good news” over the past days has been “bad news”, that is, according to investors. Furthermore, Fed chairwoman Janet Yellen used the words “stretched valuations”, a clumsy and unusual choice of words. Every investor will think back to the expression “irrational exuberance” coined by former chairman of the Fed, Alan Greenspan. The markets saw even higher gains after those words by Greenspan, so I do not attribute much importance to this statement by Yellen.
Good News
But there is also enough good news. The US economy continues to pick up steam, which is pleasant. The news beneath the surface is that many global businesses are readying themselves for the future and are undergoing a true metamorphosis. The most remarkable of which are perhaps the developments surrounding IBM and Apple. Other positive news is the founding of a mini IMF. The five most important emerging economies of the world, Brazil, Russia, India, China and South-Africa (BRICS) are founding a new development bank in order to become less dependent on western financing. The behavior of the west towards Russia for example, is in my view childish and only underlines my thoughts on the matter. In short, in a relatively calm week, enough is happening underneath the surface.
It remains for me to wish you a good weekend.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has position in IBM and no position in other above shares and has no intention of doing so in the next 72 hours.
