- ECB QE too late to ignite significant growth
- Focus on Greece after Syriza victory
- Airlines watched as AIG ups Aer Lingus bid
By Patrick Butler
In a Nutshell:
Market sentiment last week was dominated by the European Central Bank meeting and announcements on Thursday. These were important not just for the Eurozone, but for the world economy. Stock markets worldwide, by and large, travelled hopefully into the announcement, and when it turned out that the monetary expansion planned (€1.1 trillion over the next eighteen months) was even bigger than expected, the rally continued.
This quantitative easing is designed to stimulate bank lending and investment, injecting new life into the demand side of the Eurozone; simultaneously (as last week’s surrender to the inevitable by the Swiss National Bank demonstrated) it will further weaken the euro, giving exporters a shot in the arm. As a major trading partner, the UK will benefit from any additional growth in the Eurozone economy, although the competitive devaluation of the euro will prove more problematic as domestic industry has to compete with cheaper imported goods, and UK exporters, similarly, are put at a cost disadvantage.
Many economists feel that the value of QE is, at least in part, psychological, demonstrating that the Eurozone authorities really do have the will and the wherewithal to do whatever it takes, not only to hold the bloc together, but to revive its flagging fortunes.
We believe, in the medium term, that QE will help only marginally in reigniting substantive growth. It comes five years too late for to cause a dramatic revival in productive activity and demand. It will, however, mean that far more money is chasing the same limited number of asset-purchase and investment opportunities, both within the Eurozone and outside it, as a significant part of the financing wave is likely to leak out to neighbouring countries and beyond. In short, a new asset bubble is being created, which, for the foreseeable future, is going to provide equities with a major source of strength. In the end, the bubble will burst. But the end is a long way away right now.
This is not to say that stock markets will go up in a straight line. Volatility – as this blog has commented before - is pre-programmed, not least because the “plumbing” of the financial markets – the means of transmission and the inventory buffers – have been so reduced since the crash, and the savings overhang
so increased (last week, once again, by this massive QE) that huge swings can occur on relatively small turnover.
This week, once more, the Eurozone will be the centre of attention as the results of the Greek election become clear, and the negotiations over Greece’s next refinancing get underway. Expect much posturing from Schäuble and other European politicians as they face off (in the most likely scenario) against a Syriza –led coalition. The end result will take much more than a week to play out, but is likely to be another haircut, once again largely disguised as a prolongation and interest-rate reduction, with more cash being made available by the Euro-bloc, fooling no-one of any intelligence.
The can is being kicked further down the road, with the fundamental problem, the straitjacket of one monetary policy on divergent economies, not being convincingly addressed The cost of this omission is being borne by us all, with the biggest burden falling on the young generation, who lack the insulation of a savings pot and who, in many Eurozone countries, lack employment to pay day-to-day costs, let alone build capital.
Results this week from Shell will reflect the need to retrench in the face of the steep and protracted decline in oil prices. We anticipate that Shell will be stripping close to 10% in costs from its 2015 spending plans. Having already shuttered its Brent production platforms it is now likely to turn its attention to reducing expenditure in North America.
Investors will applaud substantive moves to help the bottom line, but will have to wait until the demand/supply equation starts to even out before they see a sustained improvement in the share price.
Shire shareholders, on the other hand, are likely to see further price appreciation with the news that the FDA has approved Natpara for licencing, a drug for treatment of a parathyroid gland condition. Natpara is produced by NPS Pharmaceuticals which Shire bought recently before the drug was licenced. The value of that investment has effectively soared in the light of this positive news.
This week AerLingus is expected to approve a new takeover bid by British Airways owner IAG. IAG, owner of British Airways and Iberia, has submitted a fresh bid of c. €2.50 (£1.87) per share. The deal values the carrier at about €1.3bn (£971m). As the Irish government still owns 25% of AerLingus, there will doubtless be a political row over the potential acquisition, though we anticipate that IAG will finally get its way.
By acquiring Aer Lingus, IAG would gain more take-off and landing slots at Heathrow - valued at around £15m each. This transaction will focus attention on IAG’s impressive turnaround. Just three years ago the company was plagued by industrial action and –relative to the competition – excessive work-force costs. These days it is Air France and Lufthansa facing these problems, while IAG builds market share, increases capacity utilisation and enjoys the precipitous plunge in aviation fuel prices.
EasyJet’s trading statement on Tuesday should similarly mirror continued success in increasing capacity utilisation; the company is, in our view on track for another excellent quarter.
Finally, watch out for the UK fourth quarter GDP growth figures due out on Tuesday. These are likely to show QoQ growth of between 0.6% and 0.7%, meaning that the UK now comfortably exceeds the levels seen before the 2008/9 crash. Consumption is also on the increase – good news for retailers. If, as the Sunday Times reports, Philip Green has put the BHS chain up for sale, he will undoubtedly be expecting a full price.
Monday, 26 January:
UK corporate earnings announcements: Final Result Porvair PLC (PRV) SThree PLC (STHR), Trading Statement Cranswick PLC (CWK) AVEVA Group PLC (AVV) LondonMetric Property (LMP).
Tuesday, 27 January:
UK corporate earnings announcements: Interim Result Mattioli Woods PLC (MTW) PZ Cussons PLC (PZC) Polyus Gold International (PGIL) Crest Nicholson Holdings Plc (CRST) Benchmark Holdings Plc Ord 0.1p (BMK), Trading Statement easyJet PLC (EZJ) Foxtons Group PLC (FOXT) Greencore Group PLC (GNC) Marston's PLC (MARS) Gem Diamonds Ltd (GEMD) British Land Co PLC (BLND) Britvic PLC (BVIC) Carpetright PLC (CPR).
Wednesday, 28 January:
UK corporate earnings announcements: Interim Result Ebiquity PLC (EBQ), Trading Statement Johnson Matthey PLC (JMAT) Antofagasta PLC (ANTO) Intermediate Capital Group PLC (ICP) Brewin Dolphin Holdings PLC (BRW) Anglo American PLC (AAL) Sage Group (The) PLC (SGE).
Thursday, 29 January:
UK corporate earnings announcements: Interim Result Kofax PLC (KFX) Renishaw PLC (RSW) Rank Group (The) PLC (RNK) Haynes Publishing Group PLC (HYNS) Hansard Global PLC (HSD) CPL Resources PLC (CPS) ANGLE PLC (AGL) Diageo PLC (DGE) Filtronic PLC (FTC), Final Result Samsung Electronics Co (BC94) Royal Dutch Shell (RDSA) Kcell Jsc (19PS), Trading Statement RPC Group PLC (RPC) 3i Group PLC (III) Great Portland Estates PLC (GPOR) Lonmin PLC (LMI) Euromoney Institutional Investor PLC (ERM).
Friday, 30 January:
UK corporate earnings announcements: Interim Result BT Group PLC (BT.A), Trading Statement Vedanta Resources PLC (VED), KCOM Group PLC (KCOM).
–Edited by Clare MacCarthy
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