An Alternative Scenario
By Yiannis G. Mostrous
ANTWERP, Belgium–The world’s stock markets can rally in the short term, especially if the US economy doesn’t produce any big surprises to the downside. Investors should treat such a rally as tactical in nature and therefore steer clear of major portfolio restructuring.
As I noted last week (see SRI, 23 August 2006, Fall Rally?), if a rally arises, Asian technology stocks–particularly those based in the neglected Taiwanese market–should perform well. I expect technology issues to get a boost from increased corporate investment as businesses pursue IT equipment upgrades, even as the US consumer takes a step back.
Many readers have asked about alternative market scenarios floated by other pundits and observers. The idea with which I agree most is that the major indexes could retest the June lows if markets decide they haven’t properly assessed the dangers of a US economic slowdown. As I wrote last week:
Source: Bloomberg LP
Being in the most economically vibrant city (well, 70 percent of the world’s diamond trade passes through here) of one of the most open economies in Europe (Belgium’s leading economic indicators generally lead the rest of Europe; see SRI, 31 May 2006, Looking For Answers), I’m reminded that the continent has been improving its economic performance.
I’ve repeatedly noted (see SRI, 26 April 2006, Stiff Upper Lip) that Europe’s market and economic performance this year will surprise many observers. The Eurozone is now expected to grow by at least 2.5 percent, an extreme improvement over recent years. Growth is increasingly driven by domestic demand and less by global conditions, a scenario I forecast in my previous discussions of the Eurozone economy.
As I walk the elegant shopping areas of Antwerp, I can feel–and in conversations with locals it’s been emphasized–that people are increasingly bullish in regard to their futures and have no problem increasing debt to support consumption. Retail sales are up almost 2 percent in real terms and are expected to pick up even more. Unemployment is below 8 percent, wages are rising and industrial production is growing at 4.3 percent due to global orders as well as strong intra-Euro trade.
I have no regrets about including three European companies in the SRI Portfolio. After all, this is a global advisory; whenever an opportunity arises, the idea is to capitalize on it.
I continue to think Europe will do quite well this year, outperforming the US, especially if you consider the currency difference. The euro continues to strengthen against the US dollar.
The Eurozone tech sector seems to have the potential to perform well in a rally into the fall. One stock in particular that could shine is Netherlands-based ASML Holding NV (NSDQ: ASML), a provider of advanced technology systems for the semiconductor industry.
ASML exhibits characteristics similar to the European IT sector as a whole as well as its Asian counterpart: good growth prospects. It’s been unpopular for so long, and the company has been cleaning up its balance sheet.
But being in Northern Europe as colder nights are creeping in, I can’t help but talk about energy and, consequently, Russia.
As regular readers are aware, Russia is one of my favorite markets. Its long-term potential is solid (see SRI, 28 June 2006, Speaking Of Bears, SRI, 17 July 2006, My Friend, The President Of The United States, George W. Bush and Geopolitics & Investing, 2 August 2006, Still Playing the Great Game). As the geopolitical scene evolves, countries that until recently weren’t important matter again. Russia is a prime example.
Moscow-based Gazprom (referred to here previously as “the world’s gas company”), a core Portfolio holding, has promised to partner with Venezuela in building major pipelines. TMK, Russia’s leading pipe maker, has signed a deal to make the pipes. And Lukoil is investing in the country. Russia and Venezuela are pressing Argentina to join their energy efforts.
But governments in Europe are also realizing that Russia is here to stay when it comes to energy. Gazprom already supplies a quarter of Europe’s gas; that share will only increase. At the same time, Russian energy companies are moving to secure alliances that would allow them a bigger slice of the pie. Such moves would also benefit other parts of the Russian economy.
Gazprom and Algeria’s Sonatrach agreed to work together on liquid natural gas (LNG) projects and jointly bid on foreign projects. (Gazprom has signed a similar deal with China’s national energy company.) This is an important deal because Algeria already supplies 15 percent of Europe’s gas. It’s obvious that a strong alliance between these two energy suppliers would effectively allow them to dominate the European market while dramatically increasing their market share.
Italy remains one of the countries most affected by these developments. It imports 80 percent of its gas, with 32 percent coming from Russia and 37 percent from Algeria. Italy must deal with this situation; evidence points toward an eventual gas deal with Russia and more cooperation between the two nations in the future.
(Italy’s economy has so far missed out on the good performances turned in by its European counterparts. But things are slowly changing in the land of football’s world champions, and I’m compelled to go bargain hunting in this unloved market. I’ll have more on Italy in an upcoming issue.)
Germany is on the opposite end of the energy spectrum. The country’s previous leadership understood that cooperation with Russia is not only inevitable, but desirable as well. Former Chancellor Gerhard Schroeder was the architect of this relationship. The most obvious benefit so far is a new gas pipeline that will run from Russia straight to Germany’s Baltic Coast, conveniently bypassing the Baltic states and the always annoying (at least to its European Union partners) Poland.
In a move very well-known to US politicians, after his defeat in the most recent German elections, Schroeder lost no time in jumping in as the head of the Gazprom-controlled consortium that will build the pipeline. Schroeder’s move means that Germany has a strong lobbyist inside the most powerful gas company in the world.
Many SRI readers have asked for more ideas on Russia; rather than tossing out new names, I’ll reiterate the recommendations I made two months ago. These companies aren’t included in the SRI Portfolio, but they remain favorite alternative plays on the Russia story and I do follow them: Lukoil (OTC: LUKOY), Vimpel-Communications (NYSE: VIP) and Wimm-Bill-Dann Foods (NYSE:WBD). Please note that I won’t provide regular updates on these companies.
ANTWERP, Belgium–The world’s stock markets can rally in the short term, especially if the US economy doesn’t produce any big surprises to the downside. Investors should treat such a rally as tactical in nature and therefore steer clear of major portfolio restructuring.
As I noted last week (see SRI, 23 August 2006, Fall Rally?), if a rally arises, Asian technology stocks–particularly those based in the neglected Taiwanese market–should perform well. I expect technology issues to get a boost from increased corporate investment as businesses pursue IT equipment upgrades, even as the US consumer takes a step back.
Many readers have asked about alternative market scenarios floated by other pundits and observers. The idea with which I agree most is that the major indexes could retest the June lows if markets decide they haven’t properly assessed the dangers of a US economic slowdown. As I wrote last week:
It’s possible that markets are underestimating the slowdown in the US economy, but it’s impossible to define with certainty those factors the markets have discounted and those they haven’t. It’s therefore extremely difficult to quantify any impact. At this juncture, I recommend constraint but not bearishness because the market can rally from here.
Source: Bloomberg LP
Being in the most economically vibrant city (well, 70 percent of the world’s diamond trade passes through here) of one of the most open economies in Europe (Belgium’s leading economic indicators generally lead the rest of Europe; see SRI, 31 May 2006, Looking For Answers), I’m reminded that the continent has been improving its economic performance.
I’ve repeatedly noted (see SRI, 26 April 2006, Stiff Upper Lip) that Europe’s market and economic performance this year will surprise many observers. The Eurozone is now expected to grow by at least 2.5 percent, an extreme improvement over recent years. Growth is increasingly driven by domestic demand and less by global conditions, a scenario I forecast in my previous discussions of the Eurozone economy.
As I walk the elegant shopping areas of Antwerp, I can feel–and in conversations with locals it’s been emphasized–that people are increasingly bullish in regard to their futures and have no problem increasing debt to support consumption. Retail sales are up almost 2 percent in real terms and are expected to pick up even more. Unemployment is below 8 percent, wages are rising and industrial production is growing at 4.3 percent due to global orders as well as strong intra-Euro trade.
I have no regrets about including three European companies in the SRI Portfolio. After all, this is a global advisory; whenever an opportunity arises, the idea is to capitalize on it.
I continue to think Europe will do quite well this year, outperforming the US, especially if you consider the currency difference. The euro continues to strengthen against the US dollar.
The Eurozone tech sector seems to have the potential to perform well in a rally into the fall. One stock in particular that could shine is Netherlands-based ASML Holding NV (NSDQ: ASML), a provider of advanced technology systems for the semiconductor industry.
ASML exhibits characteristics similar to the European IT sector as a whole as well as its Asian counterpart: good growth prospects. It’s been unpopular for so long, and the company has been cleaning up its balance sheet.
But being in Northern Europe as colder nights are creeping in, I can’t help but talk about energy and, consequently, Russia.
As regular readers are aware, Russia is one of my favorite markets. Its long-term potential is solid (see SRI, 28 June 2006, Speaking Of Bears, SRI, 17 July 2006, My Friend, The President Of The United States, George W. Bush and Geopolitics & Investing, 2 August 2006, Still Playing the Great Game). As the geopolitical scene evolves, countries that until recently weren’t important matter again. Russia is a prime example.
Moscow-based Gazprom (referred to here previously as “the world’s gas company”), a core Portfolio holding, has promised to partner with Venezuela in building major pipelines. TMK, Russia’s leading pipe maker, has signed a deal to make the pipes. And Lukoil is investing in the country. Russia and Venezuela are pressing Argentina to join their energy efforts.
But governments in Europe are also realizing that Russia is here to stay when it comes to energy. Gazprom already supplies a quarter of Europe’s gas; that share will only increase. At the same time, Russian energy companies are moving to secure alliances that would allow them a bigger slice of the pie. Such moves would also benefit other parts of the Russian economy.
Gazprom and Algeria’s Sonatrach agreed to work together on liquid natural gas (LNG) projects and jointly bid on foreign projects. (Gazprom has signed a similar deal with China’s national energy company.) This is an important deal because Algeria already supplies 15 percent of Europe’s gas. It’s obvious that a strong alliance between these two energy suppliers would effectively allow them to dominate the European market while dramatically increasing their market share.
Italy remains one of the countries most affected by these developments. It imports 80 percent of its gas, with 32 percent coming from Russia and 37 percent from Algeria. Italy must deal with this situation; evidence points toward an eventual gas deal with Russia and more cooperation between the two nations in the future.
(Italy’s economy has so far missed out on the good performances turned in by its European counterparts. But things are slowly changing in the land of football’s world champions, and I’m compelled to go bargain hunting in this unloved market. I’ll have more on Italy in an upcoming issue.)
Germany is on the opposite end of the energy spectrum. The country’s previous leadership understood that cooperation with Russia is not only inevitable, but desirable as well. Former Chancellor Gerhard Schroeder was the architect of this relationship. The most obvious benefit so far is a new gas pipeline that will run from Russia straight to Germany’s Baltic Coast, conveniently bypassing the Baltic states and the always annoying (at least to its European Union partners) Poland.
In a move very well-known to US politicians, after his defeat in the most recent German elections, Schroeder lost no time in jumping in as the head of the Gazprom-controlled consortium that will build the pipeline. Schroeder’s move means that Germany has a strong lobbyist inside the most powerful gas company in the world.
Many SRI readers have asked for more ideas on Russia; rather than tossing out new names, I’ll reiterate the recommendations I made two months ago. These companies aren’t included in the SRI Portfolio, but they remain favorite alternative plays on the Russia story and I do follow them: Lukoil (OTC: LUKOY), Vimpel-Communications (NYSE: VIP) and Wimm-Bill-Dann Foods (NYSE:WBD). Please note that I won’t provide regular updates on these companies.