Global CIO Commentary by Scott Minerd
“After visiting Europe last week I remain fairly sanguine about the situation there, especially given policymakers’ apparent commitment to continuing to tackle the issues that confront the Eurozone. While we will inevitably go through fits and starts, the bottom line is that Dr. Draghi’s resolve to keep the euro intact is supporting confidence in the region.
Wages in Greece and Spain have come down meaningfully over the past year and we are also seeing increased inflation in Germany. As these trends continue, the periphery will become more competitive relative to the core, which should ultimately increase demand for employment in the nations which are worst affected by the crisis.
Over the weekend, Germany’s finance minister Wolfgang Schäuble said that a Greek exit from the Eurozone is not an option, and there is now talk about relieving some of the austerity pressures on the periphery. This would give Greece more time to meet its targets and lessen the expected budget constraints facing Spain and Italy. Although it appears the establishment of a banking union may be delayed by another year, its occurrence is almost inevitable at this point. A banking union is key because it would be difficult for Europe’s problems to unravel further under a common regulator.
Finally, there are now open discussions and a broader consensus about the need for federalization in Europe. I see all of these developments as straws in the wind that tell us this is a buying opportunity for relatively depressed European equities.”
Economic Data Releases
Robust Retail Sales Should Bode Well for 3Q GDP
U.S. retail sales rose 1.1% MoM in September, with upward revisions to both the August and July data. With all three months in the third quarter now having reported, the average quarterly change was +1.4% from the previous period. The strong growth in retail sales should bode well for personal consumption and will lift GDP growth for the quarter. Meanwhile, industrial production rose 0.4% in September, and the capacity utilization rate increased modestly to 78.3%, up 0.3% from the previous month but still well below historical norms. Both the consumer price index and the producer price index reported higher-than-expected monthly increases in September, led by increases in food and energy prices. In October, the regional manufacturing index for New York rebounded to a three-month high, and the University of Michigan consumer confidence continued to advance to a five-year high. Jobless claims fell substantially to 339,000 last week, the lowest level since 2008.
A Positive Week for the Eurozone and China
Economic data releases last week were largely positive for the Eurozone and China. In August, industrial production in France and Italy increased unexpectedly and the Eurozone industrial production increased for the second consecutive month. The Centre for European Economic Research (ZEW) economic sentiment for the Eurozone rebounded to its highest level in six months in October, with the survey for Germany rising to a five-month high. Consumer price indices for European countries were largely unchanged on a YoY basis in September. In China, September’s trade balance rose to a three-month high of $27.7 billion, led by the 9.9% YoY growth in exports. Also in September, Chinese CPI growth slowed to 1.9% YoY with PPI falling to -3.6% YoY. Although bank loans in China increased less than expected in September, the M2 money supply advanced 14.8% YoY, the fastest increase in 15 months. Japan’s industrial production dropped1.6% MoM in August and machine orders fell 3.3%. Central banks in both South Korea and Brazil lowered their benchmark interest rates last week.
Chart of the Week
MSCI Regional Equity Indices’ Price-to-Earnings Ratio
European stock markets have outperformed the U.S. market over the past four months. The Morgan Stanley Capital International (MSCI) Europe total return index has gained 20.4% since June this year, compared with the 10.6% total return generated from the U.S. stock market during the same period. Despite the recent rally, European stock markets are still undervalued on a relative basis. In particular, stock markets in Germany, France and Italy currently present attractive entry points, as the forward price-to-earnings ratios in those countries are sitting well below their historical averages. Additionally, the exceptionally low (and in some instances negative) government bond yields in core European countries make the equity market’s current dividend yield of 3.5% - 4.5% even more appealing.
Source: Bloomberg, Guggenheim Investments. Data as of 10/15/2012. *Note: Data for historical average P/E ratio is adjusted for negative earnings and available since 1996.
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