Wednesday 31st July 2013
I read this morning that Goldman Sachs Asset Management
(GSAM) has significantly increased its exposure to European equities (Goldman bets on Eurozone recovery). Their belief is that the European recession is about to end. They may have a point. Having
been in the doldrums for over two years, the German, French and Italian
manufacturing purchasing managers indices (PMIs) are on the cusp of signalling expansion. As far as economic
surveys go, there is no better indicator than the PMIs. The German and French
service PMIs are also on the up. Germany, France and Italy is c. 75% of the
Euro Area, which is all that counts. Two years in contraction is a long time.
Improving economies means less insolvencies, which should
equate to less impairments for the banking sector. Just look at how that has benefited the UK and Irish banks this past year. The share prices of Lloyds,
Barclays, RBS and Bank of Ireland have each more or less doubled over twelve
months.
Price to book ratios have improved. According to
Bloomberg, Lloyds is now priced at 1.1x book, as compared to less than 0.5x in
early 2012. Bank of Ireland, would still appear cheap at 0.5x. I have already
bought some Bank of Ireland.
With Europe possibly on the mend, and clear evidence of how an
improving economy has impacted the UK and Irish banking sectors, I've taken a
speculative position in UniCredit (UCG IM, mkt cap €23.7bn) at €4.10/shr. However, cognisant
of the fact that Europe has a history of presenting false dawns and that the
representations of all these banks’ capital adequacy may be complete hokum, via ETX I've hedged with €4 September puts at a cost of 17 €cents/shr. My instinct is that UCG will move higher
relatively quickly on improving economics; I'm targeting €5.5/shr. With the puts, I reckon I've risked
€1 to win €4. I think the odds should be better than that. Bloomberg suggests
that UCG trades on 0.38x book value. A 0.5x multiple would roughly sit with my expectation
of €5.5/shr.
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| Germany, France, Italy - manufacturing Purchasing Managers Indices Source: Markit, Bloomberg |
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| Germany, France, Italy - service Purchasing Managers Indices Source: Markit, Bloomberg |
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| LLOY, BARC, RBS, BKIR - 12 month share price performance Source: Bloomberg |
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| Price to book ratios - UCG, LLOY, BARC, RBS, BKIR Source: Bloomberg |
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| UniCredit - share price Source: Bloomberg |
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