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Wednesday, 13 December 2017

What is the opposite of "the perfect storm"?

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Monday was very much a day of two halves in Europe with the morning sentiment dominated by an uninspiring Tankan survey out of Tokyo and the afternoon clearly in the grips of a stronger than expected ISM Manufacturing Survey in the United States. Did Europe in its own rights have nothing to say? So much has been said and there has been so much vacuous talk that I feel European investors have closed their eyes and their ears to economic releases over here out of frustration and despondency.

Anthony Peters, SwissInvest Strategist

The overall March Manufacturing PMI for Europe, also reported yesterday, was unchanged at 47.7 but the components were so mixed that it becomes hard to form a picture of how things are really panning out. The UK, which is supposedly back in technical recession according to the OECD, saw its figure reported as 52.1 (expected 50.7) and the February figure was revised up from 51.2 to 51.5. Technical recession?

At the same time, booming Germany has a PMI at 48.4 and France, facing the first round of Presidential elections at the end of this month, saw the PMI miss the 47.6 forecast and land at a grim 46.7, the weakest reading since June 2009. Having decided that there is no guidance to be gained from its own economic numbers – or nothing that would support the basic bullishness in equity investors’ minds – they all pounced on the American news and the DAX, having hit a low in the morning after the PMIs of 6,911.63 contrived to close at the day’s high of 7056.65.

I am currently sitting contemplating an invitation to Madrid in order to join a conference panel on the state of Spanish banking. I’m not sure that I know much more about the subject than my cleaning lady (who has never been to Spain), but it appears that some overenthusiastic journalist in the national press must have tripped over and quoted some witty one-liner I had penned on the subject and, hey presto, I’m an expert. If that makes me worth being a panel member at a pukka banking conference in Spain, what does it tell me about some to the so-called experts I have been listening to at such events over the years? Gulp!

Alas, I did see an article somewhere which noted that the Spanish authorities are keeping up the pressure on their banks to continue to clean up their ravaged balance sheets and to further dispose of distressed property loans. The article suggested that another fire-sale of residential real estate could push overall prices down another 14% (I don’t know where they get that exact number from), thus pushing existing property owners further into negative equity.

That is a slightly parochial British way of thinking but I have heard of an Australian investment fund which was interested in picking up a portfolio of prime properties in Spain, but that it was also looking for guaranteed rental income. The European property consultant concerned sadly had to disabuse them of the idea that there would be meaningful rental income to be achieved on Spanish resi; in his thinking it will remain so for a long time to come.

This is where the Spanish problem lies – the price of a financial asset will fall until the yield rises to an acceptable level. However, it is not really possible to see where that point is in Spanish real estate as the slow economies and shrinking disposable incomes of those foreigners who drove that market have not stabilised either yet.

Add the fiscal burden of supporting the EFSF/ESM which would have to be faced Northern European tax-payers, should it be hit with the “double whammy” of Spain both drawing and ceasing to be a contributor, and the floor on property prices slips away further. It is clear that the Spanish authorities want to finally put a floor on the continually weakening regional banking system, but they are dealing with targets which could be moving faster and more erratically than they, even with the best will in the world, are able to follow.

Anyhow, on more practical matters, volume-wise the week got off to a very slow start which can only be ascribed to institutions being preoccupied with quarter-end reporting, the school holidays having kicked off on both sides of the Atlantic and the general reluctance to commit money to a market in which there is no real directional conviction. What is the opposite of “the perfect storm”?

I took the opportunity to meet up at lunchtime with a couple of old bond dogs at what was once one of the most beloved watering holes in the City of London. Not only was it empty – 20 years ago you queued at the bar for 20 minutes to get a drink at lunchtime (if you could find it through all the smoke) – but even when empty it took them the same 20 minutes to make me a cheese and pickle sandwich. I guess it was my own fault for passing by the sushi and spring-water takeaways. Let’s hope for better today.

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