Fund Manager
Frank Mersch
Despite the Chinese stock market-induced panic selling at the end of February, global markets proved to be remarkably resilient during the month of March, with the TSX rising 2.3% and the S&P 500 up 2.4%. From our point of view, this was just the latest in a growing list of potential negative shocks (i.e. US sub-prime lender woes, Yen carrytrade unwinding, Iranian-captured British sailors, etc.) that the global equity markets have managed to shrug off with little effort. Indeed, it took only seventeen trading sessions for the Chinese equity market to recover its losses, and it has subsequently moved significantly higher. It certainly helped that during this time sentiment shifted sharply towards the belief that the US Federal Reserve had moved into rate-cutting mode and that lower interest rates were in the offing. Although much of the economic data over the past several weeks has corroborated this stance, the key holdout has been inflation, which remains stubbornly high. With important measures such as the CPI and PCE running at 2.7% and 2.4% year over year, we still believe that the Federal Reserve will be on the sidelines for the time being despite sub-par economic growth. This expectation, combined with shrinking corporate profit margins, should keep US equities trading sideways over the next several months.
On the global growth front conditions remain robust, with key emerging economies experiencing accelerating growth through the first quarter of the year. In particular, the Chinese economy seems to have moved into another gear on the back of surging exports, despite the half-hearted attempts of Chinese officials and the diplomatic efforts of US trade protectionists. The impact can clearly be seen in terms of base metal consumption and pricing over the past several weeks, with copper reversing its major January sell-off and nickel seemingly hitting new highs on a daily basis. We maintain our bias towards the base metals, as well as the precious metals – a bias that is only strengthened by the ongoing slide in the US Dollar. On the energy side, it would appear that a recovery is underway in both the commodities (namely natural gas) and the equities. Although we are positive on natural gas pricing over the balance of the year, we are far from being buyers of all things energy. The relatively weaker conditions and resulting balance-sheet stress of the past few months have created a definite quality gap in the energy sector. As always, we favor those entities with high quality assets and capable, proven management.
Finally, we are encouraged by the ongoing torrent pace of global M&A, with $3.6 trillion in announced transactions over the past year. Although this is a slightly slower growth rate than a few months ago, it is still running 31% higher than a year ago. Given the low level of real interest rates and the abundance of demand for high-yield debt, we would expect this situation to continue.
Frank Mersch - Q1 2007 Commentary
Date Published
Fund Manager
Despite the Chinese stock market-induced panic selling at the end of February, global markets proved to be remarkably resilient during the month of March, with the TSX rising 2.3% and the S&P 500 up 2.4%. From our point of view, this was just the latest in a growing list of potential negative shocks (i.e. US sub-prime lender woes, Yen carrytrade unwinding, Iranian-captured British sailors, etc.) that the global equity markets have managed to shrug off with little effort. Indeed, it took only seventeen trading sessions for the Chinese equity market to recover its losses, and it has subsequently moved significantly higher. It certainly helped that during this time sentiment shifted sharply towards the belief that the US Federal Reserve had moved into rate-cutting mode and that lower interest rates were in the offing. Although much of the economic data over the past several weeks has corroborated this stance, the key holdout has been inflation, which remains stubbornly high. With important measures such as the CPI and PCE running at 2.7% and 2.4% year over year, we still believe that the Federal Reserve will be on the sidelines for the time being despite sub-par economic growth. This expectation, combined with shrinking corporate profit margins, should keep US equities trading sideways over the next several months.
On the global growth front conditions remain robust, with key emerging economies experiencing accelerating growth through the first quarter of the year. In particular, the Chinese economy seems to have moved into another gear on the back of surging exports, despite the half-hearted attempts of Chinese officials and the diplomatic efforts of US trade protectionists. The impact can clearly be seen in terms of base metal consumption and pricing over the past several weeks, with copper reversing its major January sell-off and nickel seemingly hitting new highs on a daily basis. We maintain our bias towards the base metals, as well as the precious metals – a bias that is only strengthened by the ongoing slide in the US Dollar. On the energy side, it would appear that a recovery is underway in both the commodities (namely natural gas) and the equities. Although we are positive on natural gas pricing over the balance of the year, we are far from being buyers of all things energy. The relatively weaker conditions and resulting balance-sheet stress of the past few months have created a definite quality gap in the energy sector. As always, we favor those entities with high quality assets and capable, proven management.
Finally, we are encouraged by the ongoing torrent pace of global M&A, with $3.6 trillion in announced transactions over the past year. Although this is a slightly slower growth rate than a few months ago, it is still running 31% higher than a year ago. Given the low level of real interest rates and the abundance of demand for high-yield debt, we would expect this situation to continue.