Spain adds to the worries
In the past month we have seen more of the same – the ongoing eurozone debate and the uncertainty about Greece’s fate within the monetary union.
In spite of the apparent popularity of those Greek political parties opposed to current austerity measures, the election failed to deliver a government.
Meanwhile, polls are now showing more support for the pro-euro parties ahead of the June election. A sense of reality may well have started to sink in. Almost regardless of what eventually transpires in Greece, major obstacles remain before we can consider that the eurozone crisis has been averted, never mind resolved. The most worrying of these is Spain’s banks.
As we write, yields on Spanish bonds maturing in 10 years have risen above 6.5 per cent – close to their record high. The Spanish government is said to have suggested that financial institution Bankia, with its exposure to Spanish property loans, could be rescued with €19bn of sovereign bonds for its parent company, which could then be swapped for cash at the European Central Bank’s (ECB) three-month refinancing window. This would avoid Spain having to come to the bond markets.
At time of writing, the ECB was said to be averse to this approach and denied it had expressed a position on “plans by the Spanish authorities to recapitalise a major Spanish bank”. This cannot have reassured investors concerned as to how Spain’s government can repair its banking system without further weakening its own financial situation. In the US, there has been future debate on the impact of allowing the Bush-era tax cuts to expire. Coupled with a scheduled round of automatic spending cuts which is due to take effect – some $100bn (£65bn) is due to be cut from the Pentagon and domestic agencies’ budgets – could push the US into recession. This significant monetary, and modest, fiscal tightening could lead to huge downward pressure on US consumer spending. With elections coming up, politicians’ aims may change this outcome but it remains an unfolding drama.
Another source of debate has been BP and the disagreement with its Russian venture, but much of this seems to be already factored into the price. Closer to home, given that UK GDP growth was revised to a fall of 0.3 per cent rather than 0.2 per cent in the first quarter of 2012, this meant that the UK was seeing evidence of a so-called ‘double-dip’ recession. There are discussions in the UK and the eurozone on the potential for infrastructure spending which could help to add some growth to the austerity equation.
Nonetheless, amid all these concerns, stockmarkets have come down considerably in the past few months. As a result, the valuations of many stocks with reasonable prospects are now looking extremely modest, so current conditions should be throwing up opportunities for long-term investors. Some of the companies which we view as ‘proxies’ for the general health of the UK economy have revealed in their trading statements that, while destocking certainly did take place throughout the final quarter of 2011, the first quarter of 2012 and the second quarter to date have been more positive, with trading showing no immediate sign of a fall-off. In the main, there is still a low level of stock in the system for many manufacturers.