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Bringing risk back to the table

On Thursday June 23, the UK voted to leave the EU. The next day the Euro Stoxx 50 opened 10 per cent lower. Today, two months after Black Friday, the markets recovered all that back and more.

The comeback in equity markets was partly fuelled by the reassurance from Central Banks that they will continue doing all they can. The Bank of England surprised markets by cutting rates and the Bank of Japan increased its stimulus program. This just paved the way for the ECB to increase its quantitative easing program at its next meeting on the 8th of September 2016.

So on the day Malta celebrates the victory by the Knights of St John ending the Great Siege by the Turks, Mario Draghi will be delivering his speech. Hopefully giving the investors a long awaited victory after a very turbulent first half of 2016.

We are at a point where the markets have rallied 10 per cent from their lows and investors will be asking themselves a very important question; ‘Should I stay or should I go?’

For those investors who were exposed to the markets last December, they probably will be the first to sell into this rally not wanting to end the race with unrealised losses on their account. The markets were expecting Mario Draghi to announce quantitative easing on December 3 but he failed to do so.

His inaction sent markets into risk off mode. The Euro Stoxx 50 lost 25 per cent in two and a half months, bottoming on February 11.

On the other hand, there will be those that will keep on believing in this rally and stay till the end, hoping things will go their way and the ECB president will deliver further quantitative easing.

Till now it seems that investors want to stay the course. We are seeing strong inflows in risky assets. In the last couple of weeks, emerging market debt has seen inflows which weren't seen in years.

We also kept on seeing spreads tightening on European Sovereign and High Yield Debt. The European high yield market is yielding just above two per cent on a B rated bond on average having a 25 per cent probability of default.

A few years back if you offered that to an investor he'd think you're insane for even considering it. But each time is different and this is today’s reality.

Equities remain the one of the best alternatives
So if an investor is faced with a B rated bond yielding just above two per cent, the equity market starts to look much more attractive where you have blue chip companies like Allianz and BMW yielding 6% and 5% respectively.

The drawback on equities is that we are not seeing earnings grow year-on-year. However we do not see dividend pay-outs being at risk (for the time being at least) and most companies are keeping their outlook forecasts unchanged for 2016 post H116 results.

For those looking at the equity markets with the hope of increasing alpha in their portfolio, below are two equities which have been added to our buy list:
Vinci SA and TOTAL SA.

Vinci SA is a global player in concessions and construction with expertise in building, civil, hydraulic, and electrical engineering. The Company offers construction-related specialities, road materials production, as well as finance, management, operations and maintenance of public infrastructure such as motorways, airports, and road and rail infrastructures.

TOTAL SA explores, produces, refines, transports, and markets oil and natural gas. The Company also operates a chemical division which produces polypropylene, polyethylene, polystyrene, rubber, paint, ink, adhesives, and resins. TOTAL operates gasoline filling stations in Europe, the United States, and Africa.

This article was issued by Kristian Camenzuli, 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. Calamatta Cuschieri Investment Services 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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