Important Information
This research material is issued by PAM Global Investments solely for information purposes and does not amount to an offer to any person to sell or buy any
investment in any jurisdiction where such offer would not be lawful, nor does it constitute investment advice or an investment recommendation. Any such offer or sale
may be accomplished only pursuant to a valid offering memorandum or prospectus containing all disclosures required by law. The securities and instruments listed
herein may not be offered or sold within the United States, or to or for the account or benefit of U.S. persons, unless registered under the United States Securities Act
of 1933 (as amended) (the “Securities Act”) or in a transthat is exempt from the registration requirements of the Securities Act. When distributed in, from or
into the UK it is only intended for eligible counterparties and professional clients within the meaning of the FSA Handbook of Rules and Guidance and other persons
to whom it may be communicated lawfully. No other person should act or rely on it and this document is not intended to be used as the sole basis for any evaluation
of, or decision in relation to, the securities or other instruments referred to in it. Unless specified otherwise, an investment in any of the securities or instruments
referred to in this document will place the investor’s capital at risk. Recipients will not be regarded as clients of PAM Global Investments. Clients of Bank Hapoalim
B.M. and its affiliates worldwide (“BHI”) should seek advice from their investment advisor at BHI before making a decision in relation to any matter referred to in this
document. Other recipients should seek advice from their own investment advisor.
This research is produced in accordance with the PAM Global Investments policy on the production and issue of investment research, a copy of which is available
from PAM Global Investments on request. The investments described in this document may not be suitable for certain investors and may not be available to investors
in certain jurisdictions. Many of the protections under the UK regulatory system do not apply to an investment in the products detailed within this document.
This research does not constitute investment advice or a personal recommendation to any person. In particular, it does not take into account the specific investment
objectives, financial situation or particular needs of any person. It is issued for information purposes only and must not be construed as an offer to any person to sell
or buy an interest in any investment. The indication in this document that any investment instrument is “recommended”, “suggested”, or otherwise worthy of
consideration is not intended and should not be construed to suggest that it would be a recommended or suitable investment for any particular investor. It is
incumbent on the recipient of PAM Global Investments investment research to take investment advice as appropriate.
PAM Global Investments has used all reasonable skill and care in compiling this research. The information and opinions have been obtained from or are based upon
sources that are believed to be reliable, but the accuracy of the information presented in this document cannot be guaranteed. Moreover, the information presented in
this document is as of the date indicated, and neither PAM Global Investments nor any of its affiliates shall have any obligation to update the information to reflect
changes. Neither PAM Global Investments nor any of its affiliates shall have any liability as a result of typographical or other errors in this document. No responsibility
can be accepted for any loss allegedly arising from reliance upon this research.
This document contains forward-looking statements. Persons reading this document should not place undue reliance on these statements. Forward-looking
statements include information concerning possible or assumed future results of operations, goals and objectives for future operations. These statements are
typically identified by words such as “believe,” “anticipate,” “expect,” “plan,” “intend,” “estimate” and similar expressions. Persons reading this document should
understand that such statements are not guarantees of performance or results, and that they involve risks, uncertainties and assumptions.
The value of investments and income derived from them can decrease as well as increase. Performance figures shown are based upon past performance and as
such cannot guarantee future returns.
PAM Global Investments and BHI may receive a commission or retrocession in relation to any funds or other investment instruments included in this
document. Should you require further details of such commissions and retrocessions, please contact us. The investment instruments referenced in this
document may include instruments issued, underwritten, or sponsored by BHI, or in respect of which BHI may otherwise receive compensation or have a
financial interest. The recommendation of such instruments by PAM Global Investments or the Bank Hapoalim B.M. Miami Branch may present a conflict
of interest. By investing in these instruments, you (i) acknowledge that the foregoing may, without your consent, violate the Bank Hapoalim B.M. Miami
Branch’s duty of loyalty to you, (ii) consent to, and waive, any real or apparent conflict of interest that may result from the foregoing, and (iii) waive any
right to receive further notice of the foregoing (but without limiting your right to receive additional information upon request
INVESTMENT RISKS: The investment instruments described in this document (i) are not insured by the Federal Deposit Insurance Corporation (FDIC); (ii)
are not deposits or other obligations of, or guaranteed by, BHI (unless a specific instrument represents an explicit obligation or guaranty of BHI); (iii) are
subject to investment risks, including possible loss of principal and/or depreciation in value; and (iv) may not be readily marketable.
PAM Global Investments is the marketing name of Poalim Asset Management (UK) Limited, part of the Bank Hapoalim Group.
Poalim Asset Management (UK) Limited is not registered with the Securities and Exchange Commission as an investment adviser pursuant to the Investment
Advisers Act of 1940, nor is it otherwise registered or licensed in any capacity pursuant to US federal or state law.
Poalim Asset Management (UK) Limited is authorised and regulated in the UK by the Financial Services Authority (FSA) with authorisation number 197511.
A Greek Tragedy but Not a Global Crisis
Investment Research Note – 28 April 2010
The latest flare up in the Greek tragedy has hit risk
assets. We believe this decline should prove only
temporary and that risk assets are likely to sustain
further gains over coming months:
•
The EU/IMF should in coming weeks enact a
substantial bailout package for Greece which
should solve its short term liquidity problems.
Ultimately, the EU/IMF cannot afford not to bail out
Greece.
•
While Greece may ultimately be forced to
restructure its debt, contagion should be limited.
The other peripheral European economies are
somewhat better placed than Greece. The EU may
also by then have had time to set up some
institutional arrangements aimed at containing the
crisis to Greece.
•
Equity markets have good support from an
increasingly robust global economic upturn, a
strong rebound in corporate earnings and
reasonable valuations.
Our recommendations as a result are that:
•
Fully invested investors should ride out the storm.
•
Under-invested investors, who could tolerate further
short term declines, should use the current
weakness in risk assets as a buying opportunity.
The Greek Tragedy Continues
•
S&P has downgraded Greece to junk status, cutting its
rating to BB+ from BBB+. It has also downgraded
Portugal to A- from A+ and Spain from AA+ to AA.
•
These downgrades triggered a 2% drop in the MSCI
AC World Index on Tuesday and led to further
weakness early on Wednesday. Credit default swap
spreads have surged for Greece and the other
European economies perceived most at risk – rising to
over 800bp for Greece (not far off Argentina’s 860bp)
and 400bp for Portugal before falling back. Irish,
Spanish and Italian CDS have also risen but to no
more than 150-250bp.
•
These downgrades came against the of
continuing market concerns on two fronts:
Greece’s short term financing problems:
•
A €45bn bailout package, comprising €30bn from
the EU and €15bn from the IMF, had been agreed
and Greece had formally applied for it. But
Germany is proving reluctant to pay up,
particularly with a regional election on 9 May.
•
The EU, IMF & Germany are all still wrangling
over the details. Following the latest upsurge in
the crisis, there is talk that the IMF will increase its
contribution by €10bn and that the final package
could total €55-70bn.
•
Wrangling may well continue over the next couple
of weeks with an EU leaders summit planned for
around 10 May to discuss the crisis. However,
there will be intense pressure to resolve things
before €8.5bn of Greek debt becomes due on 19
May.
Contagion and Greece’s longer term solvency
•
Given the size of the fiscal retrenchment needed
in Greece and the domestic opposition to the
cutbacks,
it is far from clear whether Greece
will ultimately avoid needing some debt relief
in the form of some kind of ‘haircut’ for
creditors.
•
However, the enactment of a bailout package
should hopefully provide the EU a breathing
space to get its act together
. This would involve
setting up some kind of institutional framework
aimed at preventing the Greek crisis from
engulfing any other countries in Europe.
Greece and Ireland have largest budget deficits
0
2
4
6
8
10
12
14
16
Ireland Greece UK Spain Portugal Italy
2009 % of GDP
Source: Eurostat
Greece and Italy have highest debt /GDP ratios
0
20
40
60
80
100
120
Italy Greece Portugal UK Ireland Spain
Public Debt (2009 – % of GDP)
Source: Eurostat
2
•
Other European countries are also better
placed than Greece
which had a fiscal deficit of
13.6% of GDP and a debt/GDP ratio of 115% of
GDP in 2009. No other country is so badly placed
both in term of budget deficit and debt levels.
•
Greece is also not large enough of itself to
represent a major threat. Its total public debt
amounts to around €300bn and only about 2.5%
of eurozone GDP.
•
Although uncertainty may not dissipate for a while,
if contagion is contained,
the Greek problem
should not threaten the global recovery in any
perceptible way
.
The Global Recovery looks Increasingly Robust
•
Recent economic data has generally surprised on
the upside.
In the US, retail sales, durable goods
orders, home sales and consumer confidence have all
recently exceeded expectations.
•
We have revised up our global growth forecasts. We
now expect the world economy to grow 4.5% this
year and 4.2% in 2011,
up from our previous
projections of 4.0% and 3.9% respectively.
World Economy is Growing Strongly Again
-2
0
2
4
6
00 01 02 03 04 05 06 07 08 09 10 11
World GDP Growth
Forecast
Source: IMF & PAM
Corporate Earnings are a Big Support
•
The Q1 earnings season has got off to a good
start
. In the US, of the 219 S&P 500 companies that
have so far reported, 80% have provided positive
earnings surprises. This ratio is well above the longterm
average of around 67%
. S&P earnings now look
set to record a gain off around 45% in Q1.
•
Global earnings are expected to see growth of
around 30% this year and 20% next year
. This
strong recovery should provide solid support for equity
prices as it is combined with reasonable valuations.
Global equities are trading on a 12-month forward
P/E ratio of 13.4, well below their average level
over the last ten years of 16.6.
•
The liquidity backdrop should also remain
reasonably supportive.
Crucially, the Federal
Reserve is not expected to start raise interest rates for
a few months yet and even then only to tighten policy
only slowly.
•
Finally, the crisis at Goldman Sachs is not
expected to pose a significant threat
to the market
recovery. While it is likely to exacerbate the regulatory
crackdown on the banks, it should still not prevent a
significant recovery in bank earnings. Indeed, bank
earnings have surprised on the upside in Q1.
•
All this means that we believe the cyclical bull
market remains intact.
While the Greek crisis may
well lead to further near term weakness, we expect
equity markets to sustain further significant gains over
coming months.
US earnings surprise strongly on the upside
45
50
55
60
65
70
75
80
85
02 03 04 05 06 07 08 09 10
% Number of Positive Surprises
Average
Source: Bloomberg
World P/E ratio is 20% below long-term average
6
11
16
21
26
90 92 94 96 98 00 02 04 06 08 10
MSCI AC World 12-month Forw ard P/E Ratio
Average
Source: Datastream
Peter J. West
Head of Research
+44 (0)20 7170 6179
Rupert Thompson
Equity Strategist
+44 (0)20 7170 6168
Kevin Baker
Fixed Income Strategist
+44 (0)20 7170 6196
Vincent Platjouw
Research Analyst
+44 (0)20 7170 6172
Cevahir Senol
Research Analyst
+ 44 (0)20 7170 6164
Important Information
This research material is issued by PAM Global Investments solely for information purposes and does not amount to an offer to any person to sell or buy any
investment in any jurisdiction where such offer would not be lawful, nor does it constitute investment advice or an investment recommendation. Any such offer or sale
may be accomplished only pursuant to a valid offering memorandum or prospectus containing all disclosures required by law. The securities and instruments listed
herein may not be offered or sold within the United States, or to or for the account or benefit of U.S. persons, unless registered under the United States Securities Act
of 1933 (as amended) (the “Securities Act”) or in a transthat is exempt from the registration requirements of the Securities Act. When distributed in, from or
into the UK it is only intended for eligible counterparties and professional clients within the meaning of the FSA Handbook of Rules and Guidance and other persons
to whom it may be communicated lawfully. No other person should act or rely on it and this document is not intended to be used as the sole basis for any evaluation
of, or decision in relation to, the securities or other instruments referred to in it. Unless specified otherwise, an investment in any of the securities or instruments
referred to in this document will place the investor’s capital at risk. Recipients will not be regarded as clients of PAM Global Investments. Clients of Bank Hapoalim
B.M. and its affiliates worldwide (“BHI”) should seek advice from their investment advisor at BHI before making a decision in relation to any matter referred to in this
document. Other recipients should seek advice from their own investment advisor.
This research is produced in accordance with the PAM Global Investments policy on the production and issue of investment research, a copy of which is available
from PAM Global Investments on request. The investments described in this document may not be suitable for certain investors and may not be available to investors
in certain jurisdictions. Many of the protections under the UK regulatory system do not apply to an investment in the products detailed within this document.
This research does not constitute investment advice or a personal recommendation to any person. In particular, it does not take into account the specific investment
objectives, financial situation or particular needs of any person. It is issued for information purposes only and must not be construed as an offer to any person to sell
or buy an interest in any investment. The indication in this document that any investment instrument is “recommended”, “suggested”, or otherwise worthy of
consideration is not intended and should not be construed to suggest that it would be a recommended or suitable investment for any particular investor. It is
incumbent on the recipient of PAM Global Investments investment research to take investment advice as appropriate.
PAM Global Investments has used all reasonable skill and care in compiling this research. The information and opinions have been obtained from or are based upon
sources that are believed to be reliable, but the accuracy of the information presented in this document cannot be guaranteed. Moreover, the information presented in
this document is as of the date indicated, and neither PAM Global Investments nor any of its affiliates shall have any obligation to update the information to reflect
changes. Neither PAM Global Investments nor any of its affiliates shall have any liability as a result of typographical or other errors in this document. No responsibility
can be accepted for any loss allegedly arising from reliance upon this research.
This document contains forward-looking statements. Persons reading this document should not place undue reliance on these statements. Forward-looking
statements include information concerning possible or assumed future results of operations, goals and objectives for future operations. These statements are
typically identified by words such as “believe,” “anticipate,” “expect,” “plan,” “intend,” “estimate” and similar expressions. Persons reading this document should
understand that such statements are not guarantees of performance or results, and that they involve risks, uncertainties and assumptions.
The value of investments and income derived from them can decrease as well as increase. Performance figures shown are based upon past performance and as
such cannot guarantee future returns.
PAM Global Investments and BHI may receive a commission or retrocession in relation to any funds or other investment instruments included in this
document. Should you require further details of such commissions and retrocessions, please contact us. The investment instruments referenced in this
document may include instruments issued, underwritten, or sponsored by BHI, or in respect of which BHI may otherwise receive compensation or have a
financial interest. The recommendation of such instruments by PAM Global Investments or the Bank Hapoalim B.M. Miami Branch may present a conflict
of interest. By investing in these instruments, you (i) acknowledge that the foregoing may, without your consent, violate the Bank Hapoalim B.M. Miami
Branch’s duty of loyalty to you, (ii) consent to, and waive, any real or apparent conflict of interest that may result from the foregoing, and (iii) waive any
right to receive further notice of the foregoing (but without limiting your right to receive additional information upon request
INVESTMENT RISKS: The investment instruments described in this document (i) are not insured by the Federal Deposit Insurance Corporation (FDIC); (ii)
are not deposits or other obligations of, or guaranteed by, BHI (unless a specific instrument represents an explicit obligation or guaranty of BHI); (iii) are
subject to investment risks, including possible loss of principal and/or depreciation in value; and (iv) may not be readily marketable.
PAM Global Investments is the marketing name of Poalim Asset Management (UK) Limited, part of the Bank Hapoalim Group.
Poalim Asset Management (UK) Limited is not registered with the Securities and Exchange Commission as an investment adviser pursuant to the Investment
Advisers Act of 1940, nor is it otherwise registered or licensed in any capacity pursuant to US federal or state law.
Poalim Asset Management (UK) Limited is authorised and regulated in the UK by the Financial Services Authority (FSA) with authorisation number 197511.
:
