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From the desk of Patrick Lenouvel



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October 2010 from the desk of Patrick Lenouvel

Still a tough market and uncertain outlook. However, as for most volatile times, this market provides great opportunities. 

Although the  economy around the world is expanding, it remains fragile and unfortunately dependent on government stimulus.  Investors have to remember that the danger of a major set back is still present.  The growth is expected to slow down in 2011.  The situation in the euro zone is far from being over:  Ireland, Portugal and Spain.  The geopolitical situation may be in the news again (Iran, Iraq, North Korea). 

Unemployment levels in many countries and especially among the young in developed countries (25%-30% in France) is not acceptable and could cause unrest.  The situation in developing countries is not sustainable politically.

Sovereign debt levels and the level of government deficits will not disappear overnight.  Countries less impacted with the financial crisis and benefiting from increased exports to Asia ,with no deficit or low levels of deficits are in a much better situation in this time of uncertainty. Despite encouragement, consumers are not yet spending as much as expected. In most countries, consumers are concerned with real estate prices (losses), their investments and employment.

China remains the centre of attention and appears to be on track for 10.5% growth in 2010, outpacing an estimated 4.5% growth for the global economy  as a whole. India and other emerging countries are also expected to show significant level of growth.    

June 2010

Budget deficits in many countries such as those in the  US, Japan and most European countries are a major problem for the future and are in fact real time bombs in the making unless the economy jumpstart and creditor countries play along with the expected strategies of the debtors countries.  It will be interesting to follow how Germany and China will handle the situation...

After of a period of positive sentiments, the market reacted violently to the Greek debt crisis.  This not only affected Greece or other European countries with high debts but also the lenders and stock markets around the world.

The US economy is improving, but economic data is not as good as expected, unemployment remains high, real estate, trade  and consumer spending figures, although improving , are not  as good as expected.  Following a period of growth, investment and capital spending are now slowing down.

Asia  remains a key driver.  Imports demand of raw materials, machinery remains strong.  Government policies  continue to encourage economic growth.  The government resistance to appreciate the currency remains strong.

March 2010

China remains the  growth engine but the US the requirement for global economic recovery. 

There are high probabilities that stock markets around the world become more volatile due to current levels of valuations and current uncertainties. This should create opportunities, but also potential losses. 

Many countries are or will have to face the consequences of their debt levels. We should also expect M&A activities, especially in North America, to remain  active.

Market confidence could easily be shaken. The Greece debt crisis is a good example.  Many factors could revert current optimism. The danger of a double-dip recession rather than the more familiar V shape still persists.

The good news have been the GDP growth in China.  For the first Quarter of 2010, China GDP growth and its demand for goods and services have been beneficial to exporting countries including Canada, Australia, Japan, Germany and many Asian countries. However, a change in China’s policies could have a negative impact, especially for these exporting countries.

France’s economy has been  expanding as a result of increased consumer demand. France is a good example of what to watch in the US.  

US Industrial output continues to grow. Reflecting in positive stock market performance in the first Quarter 2010.  Question is:  Will US consumer spending  grow without any economic stimulus?

Most commodity based markets ( ie. Canada, Australia, Russia) and exporters to China (Japan and other Asian emerging  countries) continue to perform well (using the US dollar as the base currency).  (Brazil and Norway were two exceptions for this first Quarter)

January 2010

Sovereign debt level and surprises regarding the actual size of debt have created a new dimension  to the crisisThis situation will not go away by itself

In early 2010, while the market and investor enthusiasm carried over from 2009, it soon started to change  in the later part of the month as a result of the tightening of credits in China and the fiscal situation in the US.

China remains an engine of growth but if it continues to tighten credit, this could send wave of uncertainty in the market. The US remains the big question mark and continues to remain key to renewed long term confidence.  

Countries with the lowest level of account deficits and debts as a percent of GDP should be expected to outperform

December 2009 

2009 will be remembered as a year characterized for economic meltdown with negative world GDP growth.  

The year started with a freefall economy than moved to signs of stability followed by a return to positive GDP growth.

The recovery is expected to broaden, but the question still remains its staying power over the next two to four years.

Limited access to credit and high consumer debt level continue to damper consumption and housing market recovery especially in the USA.

Once monetary and fiscal programs around the world are scaled back, developed countries economies could be vulnerable to setbacks again.

China's economic and fiscal policies may impact recovery around the world. However, country debts and account deficit could be the next big crisis unless economies jump-start again.  We are still very worry about the condition of the US banks and their lending (or should I say lack of lending) policies.

A good news, according to Goldman Sachs, companies within the same sectors are no longer as correlated as in recent months.  The selection of securities should once again have an impact of performances.   

November 2009 - From the desk of Patrick Lenouvel

Good news for the US for the third Quarter 2009...  

However, GDP growth mainly results from government stimulus.  Unemployment remain high and continue to increase.  We need continued consumer and business confidence and spending, increased export, reduction of the trade deficits, governmental spending control to ensure substainable growth.

China remains the good story, but as in the case of he USA, China continued growth is heavily dependent on government stimulus.  however, the situation is somewhat different as China is in a better financial position with its surpluses.

In both Europe and North America, business activities (mergers and acquisitions) while still at lower levels (both values and numbers) are increasing.  Valuations in some sectors are high based on historical values.


October 2009 -  From the desk of Patrick Lenouvel

The global economy continues to be pulled up by the strong performance of Asian economies...  

The recent rebound in commodity prices and supportive policies are helping many emerging and developing countries.

In other economies, there is a danger that the economic stimulus that have been driving the current rebound could gradually loose strength if confidence levels were to decrease.

The global economic outlook continues to be driven by the impact of the financial crisis and the plunge in global trade at the turn of the year.  Most economists estimate that global growth is expected to be slowly gaining momentum.  However, global growth is projected to remain sluggish.

China is leading the pack and is contributing to the recovery in other Asian countries.  It is interesting to note that Korea, Taiwan and Thailand now ship nearly three times the exports to China that they ship to the United States.

August 2009 

Is the market due for a correction?

 Although industrial companies have been reorganizing and cutting costs, high unemployment and low consumer spending prevent revenue growth and impact improved gross margins.  

The stock market has increased significantly since March 2009 and has reached levels that indicates strong economic recovery and investors' confidence.

Demand for commodities in China and the impact of economic stimulus around the world remain keys for economic outlook 

July 2009

A different game for the next few years. ..

Politics in China and other  BRIC countries, should have a major impact on stock market return performance around the world. 

We no longer can depend on US consumer spending and increased demand in the USA as a catalyst to valuate corporations.  China and other BRIC countries need to develop their infrastructure and increase consumer demand.  Commodities are expected to drive stock market return.  A game that few Portfolio managers are familiar with.

 Country debts, corporation default potentials will need to be addressed both at the political and corporation levels in order to reduce the danger of an other crisis.  History will repeat itself.  It is just a question of time.

June 2009 -   

Stock exchanges around the world have reacted sharply upwards from the March lows. 

According to the IMF, all of the advanced economies wre expected to be in a recession in 2009.  The IMF forecasts a turnaround in 2010.

The US and China remain key to a global economic recovery.  The fundamentals have not been fixed yet despite perception that the worst is over.

May 2009 -  

Gloom default outllook for 2009...

Credit default risk remains high.  Standard and Poor expects that in the US corporate speculative-grade default rate to increase within the next 12 months exceeding prior record-high levels.  

According to S&P, 297 corporate entities are rated B- or lower (almost 3 times the number from a year ago)  for a combined rated debt worth over $520 billion.  Out of the 297 corporate entities, 225 are from the USA.   

March 2009 - 

A Trader’s Paradise...  

It sounds that the world is ending.  Most companies are valued as very low prices.  Shopping centers are valued lower than the construction cost of cheap housings from the 80s.  However, uncertainty still persists.  Company revenues drop like no tomorrow. How far down can the economic situation go?

Volatility is crazy.  While screening companies around the world from Asia to Europe to America, we note that a company stock price can increase 14% one day and drop 10% the next.

Because of the large drop in valuation, portfolio managers from around the world will need to increase equity positions or renegotiate asset allocation ranges with investment committees.  This should put pressure upwards.

It is almost impossible to remain rational as too much uncertainty exist regarding future revenues, earnings, capital budgeting and bank lending policies.  This market is a trader paradise.  However, as a good trader, take your profit and run.  

January 2009 - 

Cash is king. ..

 Some great returns in selected countries are available on cash. 

Corporate bond  spreads reached levels that should be scary.   The extra yield over government bonds in the U.S. is in average 6.39 percentage points, the highest since Merrill started collecting the data in 1999. Spreads on European bonds are at a record 4.13 percentage.  It is of no surprise that in the UK, some analysts predict one in every 10 high-quality firms  may go bust. Although portfolio managers are taught  not to try to  time the market, 2009 continues to be discouraging for most.  However, there is also great opportunities for the strong at heart.  

Traditional asset allocation no longer works.   Extreme correlations among countries stock market indexes makes it almost useless to allocate funds systematically among countries. Further research is required before investing.

The role of your investment counsel or portfolio manager  is to identify the battlefields,  to identify securities that will generate cash flows or are valued below their intrinsic values or are turnaround situations.

Pension funds continue to increase their investments in alternative investments including private equities.  However, many pension funds seem to hold on and are slow to make decisions.