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10:32 on June 02 2011

Interesado en los mercados financieros

Comentario de Mayo gestores de CAZENOVE PAN EUROPEAN - Steve Cordell y Cris Rice

Buenos días,
Cazenove es una de las gestoras boutiques más conocidas en Europa. A continuación podrán encontrar el último comentario de sus  gestores de renta variable Europea Steve Cordell y Cris Rice.
El fondo PAN EUROPEO de CAZENOVE está registrado en la CNMV.
Pueden acceder a la ficha del fondo en el siguiente enlace: Ficha Pan EuropeanMarket Review

Last month we floated the idea that the expansion phase of global manufacturing cycle may have peaked, and the evidence from the data this month very much backed up that proposition. US data for manufacturing softened noticeably over May while the US housing market seems to be slipping back into recession as prices have now fallen below the previous low set in 2009. In the developing world the loss of momentum is more marked. Brazilian industrial production is currently contracting, Indian industrial production growth has halved from +15% to around +7%, while the Chinese PMI is clearly softening. The data has been more robust in Europe, especially the core countries of France and Germany, but we need not get too carried away with this short term strength. European strength is primarily coming from the export and manufacturing sectors, which will respond to the lower growth in the US and Asia only with a lag. Domestic demand is not the driver of the current spurt of growth in Europe. In Germany exports are growing at twice the rate of imports and domestic demand, while capital expenditure is growing at twice the rate of exports. Germany remains an export-oriented economy. Indeed, it is this very export strength that "crowds out" domestic consumption. We will not be a bull of German domestic demand until we see wage settlements consistently higher than current (high) productivity. The Germans are massively underpaid - they just don't know it yet. The best way to play German consumer demand still seems to be to buy Spanish hotel stocks, not German retailers! Spanish deflation is what is making Germans feel wealthier when they go there on holiday, not pay increases at home.
So the market is getting the "soft patch" of data it had been anticipating. The relative weakness of emerging economies is evidenced through the underperformance of their stock markets, while the short term rally in the dollar has led to a modicum of weakness in US and European stock markets over May. We had raised our cash levels towards the top end of our tolerance in anticipation of this weaker spot. The key question now is what is the likely trajectory of the business cycle from here? Given the extremity of both policy and the imbalances in the world economy (evidenced through the re-emergence of current account imbalances) we should not discount outlier events. This month, for a change, we will outline the happy middle road that can lead us through a natural mid-cycle "pause that refreshes" to a second expansion phase. To achieve this, there are four conditions that must be met:

  1. Emerging market interest rates must rise to such an extent so as to bring their growth rates to below trend growth. This is necessary as the extremity of US policy is forcing a higher burden of adjustment on those economies (particularly China) that refuse to allow a higher domestic currency to bear the brunt of loose dollar policy.
  2. This in turn must bring commodity prices down further. Since the turn of the year the break down in the strong positive correlation between equities and commodities is telling us that the market no longer considers rising commodity values to be "good" for equities. In 2009/10 there was a strong positive correlation as rising commodities were a sign of recovery during a period of large output gaps. The breakdown in the correlation is telling us that, in the emerging world at least, output gaps no longer prevail and further growth will only suck in more commodity inflation than can be passed on in goods prices.
  3. A fall in commodity prices can thus lead to a peak in the emerging market interest rate cycle. The authorities will have "done enough" to shift the balance of growth from the resource-intensive export sectors to the consumer sectors.
  4. And this finally will allow the West to begin the process of removing its extremely loose policy stance. The de facto transfer of terms of trade from producer to consumer implied in falling commodity and goods prices will give policy makers sufficient room for manoeuvre to begin raising rates.

This process is already underway but has further to go. While the market digests this process, we feel comfortable with our overweight positions in the value style. We are also overweight the growth defensive style. Here, we favour stocks whose growth is being achieved without the help of emerging economies (Campari, Novartis, Babcock). In the cyclical style we favour either later cycle stocks (ABB, Cap Gemini) or companies with an acquisitive strategy with which we feel comfortable (BIC, Publicis).

Fund Review

The Fund outperformed the index in May. The more defensive bias of the market favoured the portfolio's style, while we had some successes at the stock level. Novartis rallied after the closure of the Alcon deal and the technical situation weighing on the stock was removed. Our largest overweight position rallied 7%, though the strength of the Swiss franc made this a double digit return in euro and sterling terms. Campari, our third largest overweight position, rallied 7% also, reflecting upgrades to 2011 forecasts after they reported very strong first quarter profits. The major drag on performance came from profit-taking in the insurance sector. We remain comfortable with our overweight stance and have added to Munich Re during the month, ahead of a firming market for reinsurance.
The changes made to the portfolio in May were modest and mostly of a tactical nature. We have begun to add Air France after recent weakness as we anticipate further oil price falls, which should see the earnings cycle turn for airlines. We offloaded Daimler to make way for Air France after a strong run. We switched around some telcos, selling Belgacom and DT, where earnings are under pressure, in favour of BT, where momentum continues to be positive and valuation is cheaper. Towards the end of the month we added a small position in two depressed banks, Lloyds and Commerzbank, which are both starting to look undervalued, and are beginning to address some of the issues that have dragged them down.

Fund Strategy

Apart from the trajectory of the cycle we, along with all investors, will have to navigate what the end of QE2 means for the market. We tend to believe that it will not have a dramatic effect on markets - we feel investors have got accustomed to the idea and, as we have argued for some time, there is little evidence it had any direct impact upon equity prices. There has clearly been an indirect effect via the reduction of the global cost of (dollar) capital to below what it would have been without QE2. We suspect the bigger influence over stocks in the coming months will be the degree to which the global economy is decelerating, and what effect that has on commodity prices. We shall be paying particularly close attention to Chinese inflation and whether the authorities succeed in meeting market expectations of falling inflation in the second half.

  • The global economy hits a "soft patch".
  • The economy has the potential to re-accelerate later in the year provided commodity prices continue to fall.
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Unless otherwise stated all data is sourced from Cazenove Capital and DataStream. This document may include forward looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. Past performance is not a guide to future performance. The value of investments and the income from them can go down as well as up and an investor may not get back the amount originally invested and may be affected by fluctuations in exchange rates. The levels and bases of tax assumptions may change. You should obtain advice on taxation where appropriate before proceeding with any investment.
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