Carlo Vedani’s analysis

It 's time we planned investment strategies for 2013
  • As we wrote in the last report, the European Central Bank shares (announced between the month of July and September) are likely to have prevented the death of the euro but they are not (and they could not be) its cure. The only cure could be the difficult progress to be made in the bank and / or tax union
  • In line with that the prices recorded soon after this announcement in the first week of September (DOW above 16,000, DAX share over 7000, DJIA above 13,000) we drew the consequence that the probability of a breakup of the euro and / or the defaults of countries like Italy or Spain is eliminated.
  • Hence the feeling according to which September could have reserved some negative surprises on the market in respect to these values. Just for this reason we had decided to be careful.
  • The theme of this month, in fact, is the contrast between the positive news and some negative ones. These positive news come from the front of the central banks, (involved in the support of the economy using quantitative easing measures.) Let’s think for example to the results of the European central bank and the Federal Reserve System and the Bank of Japan. We expect similar measures by the bank of England. But the negative news to be taken into account concerns the framework of general economic slowdown which begins to interest not also the Europe but also US and China
  • The key point is that the liquid assets progressively put in place by central banks in a situation of "risk-off" focused on "asset class" which initially were considered 'safe' by investors (bonds U.S., UK, JPN and core Europe sovereigns, gold, dollar, SEK, NOK, CHF). This brought negative returns which gradually widen to second level "asset class" in terms of risk (U.S. and core Europe corporate). As a consequence also this asset class (reduced by inflation) brought negative returns
  • The new injection of liquidity provided by central banks, however, aims not only to expand the monetary base and therefore groped to support the economy through the channel of low interest rates, but also to change the expectations of investors in terms of prospects for structural stability of the post-crisis scenario (hence the emphasis used by both the ECB and the Fed on the term 'unlimited').
Upcoming Events
  • In particular, as regards the Europe, the scenario in the coming weeks will be characterized by the approval of the Greek bailout, reformulated in order to be sustainable with the new (worse) scenario of growth of the country, and the demand for Spanish aid under the new ESM treaty, in order to recapitalize its own banks (for amounts estimated by the financial audit carried out in just about 60 billion euro).
  • The month of October will be characterized by the Spanish theme: a belated request for aid, or a stringent EU conditionality in addition to the new already approved by Parliament maneuver of austerity, will create market tensions that inevitably will reflect on spread, with a fluctuation margin as possible around the 100 bps from the lows of September. In this situation also Italian spreads would be involved, especially in light of the growing political uncertainty due to he upcoming elections.
  • Conversely, a request for Spanish aid conditionality leading to a 'soft' in the ESM, with the addition of the activation of the MTO by the ECB, would be seen by the markets as the first concrete step in the new resolution strategy of the European crisis. Therefore it remains the idea of continuing to accumulate exposure to peripheral European countries taking advantage of moments of weakness in the market.
  • As mentioned above, such a 'tension' between an extraordinarily accommodative monetary policy (in terms of expectations) and the problems from the point of view of taxation is also present in the United States, which are currently benefiting (if only from the point of view of stock market prices) from the new QE3’s effects and the Fed's effects. However, in the American front, the equity prices seem to be already compressed (with a P / E of about 50% higher than in Europe), and therefore the opportunity to purchase in this market is limited.
Investment strategy for the month of October
In light of the above and the results achieved, ranging between + 9 and + 15%, we maintain a cautious view on short-term markets, with an "asset allocation" characterized in order to defend the performances already achieved. We are aware that, if there was an increase in volatility related to exogenous factors, we would be always ready to consider how to go about trying to make a profit. In the meantime, we will begin to plan investment strategies for 2013 ..

1 october 2012
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