17th September 2012
The prevailing view in Europe remains that the banks have, as yet, unquantified and possibly unquantifiable problems. Does this interest from abroad suggest that Eurozone investors are misreading the situation?
The China Construction Bank is the second largest Chinese bank by assets (after the Industrial and Commercial Bank of China). To date, it has forged deals in South America, North America and Southeast Asia, but none in Europe. Wang Hongzhang says that the group is now ready to deal:
"Some of the banks in Europe have been put up for sale," Mr Wang told the Financial Times in an interview. "Now we are looking for the right choice." He said CCB had Rmb100bn ($15.8bn) of capital available to acquire a whole bank or, at a minimum, to buy a stake of 30-50 per cent in a larger entity."
Does this suggest an increased optimism about the Eurozone economy on the part of outsiders after the German constitutional court ratified the European Stability Mechanism? Certainly, Hongzhang takes a more optimistic view on the Eurozone economy than many insiders:
"We are quite confident that all measures are being taken by governments and the European Central Bank to solve the European crisis," he says. And progress is sufficient to make the region as a whole an attractive place to invest, he adds. "Opportunities in Europe are critical for the development of the bank … We believe the European economy is still very strong."
There may be another factor at work. Despite a rally over the past few months, Eurozone banks are still extremely cheap relative to their history. HSBC has said that European banks are likely to benefit from new monetary stimulus in Europe and the US and will weather simmering political risk: "The strategists single out banks in a long-term bet the sector will climb back to trade at its full tangible book value, from 0.74 currently, as risks associated to the euro zone financial crisis recede.
In addition, despite a 29 percent rally in banking shares since late July, HSBC estimates large international funds are still underweight the sector."
This does not just apply to banks, but to a range of cyclical assets. Xstrata appears close to finalising its deal with Glencore. Part of the appeal has been the relatively low valuation of the mining group – it trades at just 10.5x earnings – in a climate that has been cruel to companies sensitive to the global economic climate.
These multi-billion dollar deals suggest that while investors may not yet be ready to embrace economically-exposed companies, other companies have spotted a bargain. Some investors are warming to the trend. Here Nicholas Ferres, Investment Director, Global Asset Allocation, Eastspring Investments says that global cyclicals are very cheap, while investors are getting little valuation protection from ‘safe' assets such as treasuries. He has gone overweight in the metals and mining sector to benefit from any uptick in the global economic outlook.
Much depends on the success or otherwise of the third round of quantitative easing. If previous experience is anything to go by, this will lead to strong gains in shares, commodities, property and higher-risk bonds….(QE) keeps yields on safe assets at very low levels, forcing investors to look elsewhere for returns that beat inflation.
Multi-managers such as Marcus Brookes at Cazenove Capital Management are tentatively investing in cyclical assets such as European and Japanese equities, but counterbalancing this with high cash weightings until the situation becomes clearer: "He buys into out of favour managers such as Fidelity's Sanjeev Shah and Cazenove's own head of Pan-European equities, Chris Rice.
"Currently Brookes is keeping a significant portion of cash on the books, which he said is to counterbalance volatility in holdings in European and Japanese equities, but within the next six months he "fully expects" to put this cash to work."
It may be that Wang Hongzhang believes that the Eurozone situation is improving. However, it is more likely that he can spot a bargain, and believes that the banks – underpinned by Eurozone policymakers – look cheap. This appears to be part of an increasing recognition by corporates that the valuation of cyclical assets has fallen too far. Some fund managers are picking up on the trend. Will the wider market follow suit?
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