The Greek drama has occupied most of my thoughts in the past few weeks. Since I mainly base my investment decisions on fundamentals, an outlier of this magnitude disrupted most of the logic behind my thinking.

Through the years I have accumulated enough experience to know that when you cannot make heads or tails out of the information available you should go back to the rule book. I believe that every investment manager should have a rule book to fall back to from time to time.

My rulebook is based on my past experiences which include victories and losses. I also have to thank mentors like Alex Illingworth who have contributed in no small way to what I know today.

One rule is that when prices are falling fast check your valuation models, check them again and… trust them. The same applies whenever markets are going up. Sell-side analysts have a tendency to upgrade recommendations in a bull market. This is a natural reaction to increasing market prices that keep on exceeding market prices targets.

However, there is much more pressure when markets are falling and there is a possibility of a global crisis. That is when another rule kicks in; when prices are well below valuations, buy. 

These two rules have served me well in the past few weeks when my gut feeling was clinging desperately to hope. The Greek crisis has developed into a milder situation and our recent investments turned profitable.

Obviously there was the possibility that an agreement with Greece would not have been reached. Should that have happened I trust that our numbers were stress tested enough and we would still have purchased our investments at a bargain price. We are in this game for the longer-term anyway.

Going forward we return to an equity market that hinges a little bit more on fundamentals. The Greek crisis remains in the shadows ready to pounce and China appears to be playing the kitten rather than the tiger.

Once there is more clarity on Greece we believe that the main drivers for European equity performance in the next quarters will be the Euro and a Eurozone economic recovery.

The Euro

The Euro has decline 19 percent against the Dollar and 11 percent against the Sterling over a one year period. The Euro has also declined over nine percent against these currencies year to date. The decline in the Euro provides a significant boost in competitiveness for European companies.

German companies already operating at close to capacity will probably benefit from increased earnings through higher revenues. However, the main beneficiaries will be French, Italian and Spanish firms that have significant idle capacity.

The breathing space provided by the weaker Euro will have a duel effect on peripheral European manufactures. As idle capacity starts to be absorbed employment will slowly rise and will slowly relieve the Eurozone of its main economic burden. This may be the start of a Eurozone Recovery.

Eurozone recovery

A strong increase in money supply, a weaker Euro and the possibility of more or less political clarity should provide a basis for a much awaited economic recovery. Reforms and restructuring remain core issues for long-term growth in Europe. However, it will be much easier to risk reform an investments with the Euro as tailwind.

 

This article was issued by Antoine Briffa, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. 

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