The growing list of bloopers that is europe

14 November 2011

Bloomberg – November 10th 2011

Standard & Poor’s roiled global equity, bond, currency and commodity markets when it sent and then corrected an erroneous message to subscribers suggesting France’s top credit rating had been downgraded…S&P’s erroneous message was put out at 3:57 p.m. Paris time. The company sent a release at 5:40 p.m. Paris time saying the message was incorrect and affirming France’s rating.”

Oops! Seems as though someone jumped the gun here right? Mistakes do happen, but a downgrade in error? Ouch…for France and the poor soul that may be eventually made into a scapegoat!

All humour aside, the faux-pas seems nearly symptomatic of recent events coming out of Euro-land. Cue Papandreou’s referendum idea just when the picture looked a bit brighter, the humiliating request for Silvio Berlusconi to step down and any other anticipated comedy of errors.

Days of emergency cabinets and interim leaders are upon us amidst intermittent patterns of risk on/ risk off. The question remains: what can we here in the Caribbean expect for the remainder of 2011? I’ve intentionally gone with a very short-term view, since attempting to develop a medium or long-term perspective is fraught with immeasurable difficulties.

Caribbean Development Bank President Dr. Warren Smith in his first address to the institution’s board in May 2011 spoke to the “structural weaknesses and extreme vulnerability linked to Caribbean countries’ small size, openness, narrowness of the production base and proneness to potentially devastating natural disasters.”

When will any of these issues be tackled? My guess is a timeframe beyond that of this crisis. Most countries in the region remain entrenched in mono-sectoral dependence and thereby highly susceptible to the whims of the world’s leaders, financial crises and greatly depressed levels of investor confidence.

Don’t worry, this isn’t a diatribe against Caribbean country insularity but perhaps the mantra of ‘strength in unity’ might one day make sense enough to be implemented…I hope.

My focus here is to direct you to a few ‘wins’ in spite of ‘Team Europe’ not having a good season. For simplicity’s sake I’ll be looking at USD 1 million invested in each security shown below, a one month holding period (October 11th – November 11th 2011), and the realisation of capital gains only. Lastly I’m assuming that an investor is able to buy at bid prices and sell at offer prices, just to drive the point home.

Mock Portfolio- Caribbean/ LATAM investment grade bonds

The numbers speak for themselves, and just think that if you had bought-in during late September/early October, your gains would be even healthier.

Let’s single out the Panama 2020 bond. It’s an investment grade sovereign and a credit with which you should be reasonably familiar. If a 4.50% return on investment over a month (in capital gains terms only) doesn’t catch your eye, I’m not sure what will!

These findings are indicative of a broader scenario: the realisation of opportunity accompanying crisis. If your risk appetite allows for investment in sub-investment grade credits your payoff may even have been multiplied. However, the point is not so much about going outside your comfort zone, but recognising that bad news in the markets can result in good news for you. I feel confident in saying that the Europe-induced volatility is nowhere close to being over; the issues are systemic, and a bailout only begins to ‘fill the cracks’.

Some may postulate that France, having come under heavy fire of late, would be next on the agenda after Italy and that the “error” from S&P was actually one of timing and not of fact. While emotions may drive markets, remember, trends tell a story of their own. Look out for the next chink in the European armour! The next ticking bomb may be the U.S.A. with their “super committee” reviewing budget cuts. The low likelihood of garnering support on both sides of the house within the U.S. legislature may also cause intense volatility coming to a market near you!

Gerard Stephens
Account Executive

4 Responses to “The growing list of bloopers that is europe”

  1. Senyela says:

    I am of the view that S&P’s downgrade of the USA and its missteps with respect to France, both smack of political intervention. it is clear that S&P does not have a unified executive position on the current global issues. They need to get their act together before they too lose some of their crediibilty!

  2. Senyela says:

    Some of the PIIGs have taken a sort of back seat in the Eurozone crisis for now and France, Germany and Spain, seem to be more in the limelight. Today Spain’s bond option priced at 6.65%., a far cry from its zero cost of borrowing, ie up until 2007.
    Given the newly recreated peseta, I feel that Spain may be considering leaving the euro and devaluing the peseta. That way both its debts and its wages would fall.
    What do you think?

    • Gerard says:

      Greece had their ’15 minutes’ already and you’re right; the attention is swiftly turning to France and Spain. There would be significant backlash if Spain tried to leave the bloc, just as with Papandreou’s attempt at a referendum.

      If the Euro-zone falls apart then Germany would face more expensive exports. I’m sure Merkel as the region’s paymaster won’t allow this to happen.

  3. Gerard refers to this blog on is Weekly Report dated Nov 28, 2011