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Mon 3rd Aug 08.00 GMT UK Halifax House Prices (MoM/YoY) July
Mon 3rd Aug 08.30 GMT UK Purchasing Manager Index Manufacturing July
Mon 3rd Aug 14.00 GMT US ISM Manufacturing July
Tues 4th Aug 04.30 GMT Aus RBA Interest Rate Decision
Tues 4th Aug 12.30 GMT US Personal Income (MoM) June
Tues 4th Aug 12.30 GMT US Core Personal Consumption Expenditure (MoM/YoY) June
Tues 4th Aug 23.00 GMT UK Nationwide Consumer Confidence July
Thur 6th Aug 11.00 GMT UK BoE Interest Rate Decision
Thur 6th Aug 11.45 GMT EMU ECB Interest Rate Decision
A couple of years ago, earnings growth obsessed investors and banking analysts treated Banco Santander almost as an after-thought. For every mention of Banco Santander in the UK investment press there were 10 articles on each of the other big banks; Barclays, RBOS, LloydsTSB, HBOS and HSBC. Santander just wasn’t very exciting. Plus, the London investment community, deeply in love with its own Anglo Saxon model of capitalism was ever so slightly amused at the thought that our European cousins in the Mediterranean might articulate banking management skills equal, or god forbid superior, to those in London or Edinburgh.
Now, as the country continues its efforts to formally exit the worst financial crisis in living memory the enigma that is Banco Santander is better appreciated.
But in all logic the bank should be suffering a maelstrom of problems. Santander is domiciled in Spain, arguably the most vulnerable economy in Western Europe. The group also, in 2004, acquired one of the largest British banks, Abbey National, and it would be fair to expect Abbey to have a similar depth of exposure to struggling UK consumers and the housing market as the much maligned Northern Rock, RBOS, HBOS or LloydsTSB do, (the latter two now forming Lloyds Group). But Santander isn’t in a mess, nor was it on the verge of collapse like so many banks late in 2008. It didn’t dominate the headlines with news of government bail-outs or queues of panicking savers urgently trying to extract their cash. Quietly, professionally and with minimum fuss the Spanish bank has consolidated it position, strengthened its brand in the eyes of risk-averse consumers and built a reputation amongst banking sector observers for financial integrity and stability that most other Western banks can only dream of.
Santander’s strategy of geographical diversification and a commitment to building a relatively prudent book of loans and mortgages has protected its balance sheet from the worst excesses of the debt bubble, though obviously some additional bad debt provision has been necessary. The bank should be congratulated for having paid close attention to the Good Risk Management textbook, the book HBOS management left on the shelf, collecting dust, thinking it was a secret Martian code too complex to be deciphered.
Reviewing the financials from the latest quarterly report also reassures. The group’s attributable profit in Q2 has progressed to Euro 2,423m from Euro 2,096 in the prior quarter, whilst year on year performance is a modest 4% lower. The UK contributed 16% of profits, Latin America 34% and Continental Europe 50%. H1 2009 loan provisions rose 61% to Euro 4,626 from Euro 2,880 in H1 2008 causing a 19% descent in earnings per share which otherwise would have made strong progress. A proportion of the bad debt provision maybe ‘returned’ to the P&L if actual bad debts are less than the provision. Of course it is also possible that the provision is inadequate but with a diversified business model and exposure to the relatively healthy Latin America region, the future remains brighter for Banco Santander than many of its competitors.
The chart below highlights the growth in the bank’s NYSE listed ADR (Banco Santander Cent Hisp) which is deep in over-bought territory with a 14-day RSI of 77.38, so investors should add the firm to their watch list and reconsider the question of buying if better value returns.
Banco Santander STD to 29th July 2009
Carphone Warehouse is Europe’s largest mobile phone retailer. CPW is also the UK’s most prolific supplier of residential broadband solutions, a position strengthened following the recent acquisition of Tiscali. But the group isn’t famous for being aggressively acquisitive. Most of the growth over the past two decades has been achieved through organic expansion and CPW now controls an impressive percentage of market-share from its 2,400 stores across Europe.
Such size facilitates stronger bargaining power with suppliers and creates brand value but the bigger the operation gets, particularly businesses like CPW exposed to consumer discretionary spending, the more its growth is dependent on the domestic and international economic growth rate and the financial well-being of customers. It’s therefore pretty impressive that Carphone Warehouse is on track to meet revenue and new customer targets for the year despite the UK and European recession.
The telecoms group is also owner of the TalkTalk brand, which currently forms part of a European joint venture, the other partner being Best Buy, the US electrical retailer. Whilst the synergy in consumer products, retail experience and distribution expertise appears to make sense, CPW remains committed to de-merging TalkTalk from Best Buy Europe and the management team’s recent update reaffirmed the re-organisation is on track for mid 2010 completion. Such a strategic change is an obvious distraction particularly at this stage of the economic cycle so for TalkTalk to surpass analyst’s forecasts for customer growth, gaining 47,000 new broadband accounts in the most recent quarter (consensus estimate was 37,000) is no mean feat. Post de-merger the Best Buy Europe business is planning to open a chain of electrical stores across the UK next year, a brave decision considering the dubious health of so many UK retailers, though to be fair there will be no shortage of prime sites to rent cheaply following the demise of Woolworths and other UK retailers. CPW confirmed finance has been agreed for the new stores so it looks like the venture is a definite go, recession or not.
The group, in line with the industry trend, continues to gain broadband and mobile phone business whilst fixed line telephone revenues contract. That trend will continue as new consumers, predominately younger customers, embrace mobile communication and internet solutions rather than the inflexibility of a home based fixed line telephone which fails to meet their mobile social needs. Another more recent, recession prompted, characteristic of the business is the lower churn rate as consumers persist with existing monthly contracts and phones reluctant to shop around for a new contract and phone which often entails an element of pay-up-front plus monthly cost. That shorter-term trend should reverse somewhat into 2010 though CPW is likely to be a beneficiary of churn, at the expense of the competition, if the latest quarter is a reliable guide.
Overall there are more positives than negatives to reflect on but the risk embedded into the 2010 Best Buy expansion persuades me to remain neutral towards the stock, rather than buy, but I am infinitely more amiable towards CPW stock than Vodafone (VOD) or British Telecom (BT.A) which have vulnerable distribution models and deep corporate problems respectively.
160 million people a day use products manufactured by Unilever. The firm has 400 brands of which 13 are “Billion Euro brands” including Dove, Knorr, Flora, Lipton and Sunsilk. In a recession when consumers have less cash to spend there is naturally an inclination for shoppers to fill their baskets with supermarket own-label products rather than branded goods which are usually more expensive. Investors in Unilever shares therefore awaited the Q1 2009 update with caution, in the knowledge that the firm is currently facing extreme pressures on both margins and revenue.
The firm has held up relatively well in the circumstances. Q1 organic growth was 4.8% with double-digit progress in emerging markets off-setting weakness in Western Europe. Earnings per share though, after restructuring, disposals and pension costs were down 13%, (EPS 44% weaker including exceptional items). News that turnover was 0.7% lower in the quarter relative to the same period a year earlier also required deeper investigation. The near flat performance was aided by the organic growth, detailed above, but held back but currency movements and weaker volumes. Overall, the financials were probably as good as could be expected in such difficult markets. Unilever, deeply aware that the global recession will may last through Q4 2009, has also been busy restructuring and acquiring margin-enhancing brands to strengthen its portfolio adding the Baltimor and TiGi brands to its stable. Unilever also successfully raised additional capital of $1.5 billion and £0.35 billion via two over-subscribed bond issues earlier in 2009, no mean feat under the circumstances. The firm is also acutely conscious that one of its core markets, Europe, remains particularly weak and detailed a determination within its Q1 update to invest more in product development and marketing to support key product lines adding to the Euro 927 million invested in research and development during 2008.
Looking forward, a workforce of 174,000 primarily based in 270 manufacturing sites, located in over 100 countries, looks increasingly vulnerable to cost-cutting attention if the global recession persists longer than anticipated. Meanwhile, for investors, there is a multitude of higher-growth potential shares available home and abroad that are better positioned to offer leveraged returns on the back of improving risk appetite towards equities and the 2010 global economic recovery.
UL weekly to 22nd July 2009
Investor confidence during recessions is hard won, but easily lost. Pessimism is contagious. Selling pressure can intensify, accelerating the downside momentum. Forecasts of new lows become self-fulfilling prophecies as sellers scramble to reduce exposure to risky assets. We saw this scenario late in 2008 and again into March 2009 when equity markets fell repeatedly to new multi-year lows.
Eventually the selling pressure eases. Bargain hunters see once in a decade buying opportunities. Equity markets spike up as bears rush to close short positions and bulls spot value. The question of timing is raised. Is the economic recovery in place? Is this a new dawn for risk appetite or a dead cat bounce, a suckers rally? The temptation for long investors to bank their easy profits grows, as in May and June this year. Bears open new short positions albeit more selectively than previously. Mixed economic data pulls sentiment one way, then the other. It takes a new and prolonged stream of aligned data to set a new trend. This is the phase we are in now.
A batch of economic and corporate earnings data over the past ten days has surprised on the upside and we have commenced a new bullish run in equity prices which has seen investors win back weeks of losses in just a few sessions. Talk of a return to March’s lows has disappeared. Investment banks have revised upwards, their end-of-year targets for the S&P 500, with Goldman Sachs’ revision to 1,060 the most mentioned upgrade.
The rally has substance. GDP forecasts for 2010 have been uniformly raised. US corporate earnings for Q2 have beaten forecasts. China is booming again, reporting growth of 7.9% in the period March to May. Inflationary pressures remain muted allowing monetary policy in the US, UK and Europe to stay accommodative for the rest of 2009. House prices have stabilised and consumer confidence is growing. Merger and acquisition activity is returning further supporting equity prices and risk appetite. Structural problems persist, particularly in the US and UK economies but a return to global economic growth is now certain. Unanswered questions remain. However, “Will the global recession drag into 2010?”, is not one of them. It won’t.
SPY Daily Chart to 20th July 2009
Risk appetite firmed over the week with equities benefiting from better than expected corporate earnings data, improving investor confidence, technical buying on resistance levels and an International Monetary Fund upgrade to global growth forecasts for 2010. Gold, like equities, also rallied whilst volatility, measured by the VIX index dipped again after temporarily spiking on poor jobless data from the 2nd which sparked last week’s decline.
Oil also stabilised near $60 after a brief sell off but remains rangebound with improving global sentiment offsetting growing US inventories.
Risky asset prices are not yet stretched (RSI) following the week’s progress and with most key corporations surpassing earning predictions further gains can not be ruled out in the short term.
S&P 500 Daily Chart
SPY Daily to 17th July 2009
Gold Weekly Chart
Gold Weekly Chart to 17th July 2009
Crude Oil Weekly Chart
Crude Oil Weekly to 17th July 2009
VIX Weekly Chart
VIX Weekly Chart to 17th July 2009
Whilst the UK economy cautiously continues to improve following significant fiscal and monetary stimulus elsewhere in Europe, the German economy, the long-serving export king of Europe, continues to struggle. The ZEW Centre for European Economic Research has reported deterioration in its forward looking confidence measure. The index declined from 44.8 in June to 39.5. German economists predict GDP for the year will contract by -6.0%, more or less in line with last week’s IMF prediction of a -6.2% fall. The Euro currency weakened on the news. Euro rates are currently 1.0% compared to 0.50% in the UK and a narrow range of zero to 0.25% in the US.
The German Chancellor Angela Merkel is under pressure to increase stimulus above the current pledge of 85 billion Euros to prevent Europe’s largest economy, already suffering the worst recession in 65 years, from contracting further deep into 2010.
EWG Germany iShares to 14th July
Equity asset allocation strategies have embraced more Emerging Market assets in recent years, but not enough to maximise risk-adjusted returns. I think the US, Europe will continue their relative economic decline and that must reflect sooner or later in the under-performance of ‘Western’ risky assets compared to Asian equities, etc. Of course, it depends on one’s investment horizon. But if I was to invest for 5-10 years, I am very comfortable being over-weight Asia relative to any commonly used institutional benchmark.
