The International Monetary Fund yesterday cut global growth forecasts to 3.2 per cent down 0.2 percentage points, confirming that weak consumer confidence, financial turbulence and political hostility are three main ongoing risk factors affecting the economy.

The slight positive out of the Eurozone yesterday was quick to fade, as gains on Italian bank stocks in early morning trading were wiped out and closed out in negative territory following the announcement of a €5 billion bailout fund on Monday.

The fund financed by Italy’s strongest banks and insurers was set up in the hope of easing investor concerns on the instability of Italian banks. The fund is set to provide a means to financing to weaker lenders affected by the substantial amount of non-performing loans (NPL) in the Italian economy.

However, one still needs to keep in mind that NPLs within Italian banks are close to €360 billion, thus the created fund is well below the necessary required, however it is a start.

The news clearly failed to boost Investors’ confidence and safe haven assets to date (Investment Grade sovereign debt) remains one of the best performing asset classes in the Eurozone, as they ride the ongoing wave of quantitative easing rolled out by the ECB. Having said that, high yield debt (risky) in Europe is still an outperforming asset class, primarily over the past three months.

Some hope may be emerging for distressed names in the energy sector. Many companies have struggled of late to maintain profit margins and cash generation as the energy and commodity crisis has led many energy companies to the brink of default.

Rightly so, the lower prices seen as a result of the supply glut has seen companies struggle to meet their production and operating costs and subsequently meet the profitability and cash generation needed for repayments on debt.

Companies operating in the energy sector are more often than less highly leveraged and require stable cash flows and channels of financing to meet their debt obligations.

Having said that, oil has continued to rally over the past week and has reached 2016 highs on renewed optimism of a production freeze agreement when the big global oil producers meet this weekend in Qatar.

An agreement could trigger a rally in the energy sector, potentially easing some of the financial turbulence and boosting equity markets which seem to be conditioned by the movement in energy prices.

Unfortunately a recovery on market and confidence factors alone is not fully possible. Political hostility remains a contributing factor to the volatility being experienced in financial markets.

Governments take the important decisions on fiscal measures to be undertaken in an economy. When uncertainty and tensions arise between politicians, they create a lag on the time it takes decisions and implementation of such policies to occur. In such fragile times, implementation of policies are imperatively time sensitive to coincide with the underlying fundamental data of the economy.

One of the keys to recovery will now be to closely monitor the material events that will affect the economy. An upcoming Brexit referendum, US general elections as well as future ECB and FED measures and a possible halt to oil production are set to take centre stage.

Disclaimer: This article was issued by Mathieu Ganado, Junior Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are 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. Calamatta Cuschieri Investment Seminars Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

 

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