Highlights of the Week of March 16, 2015

Dear PGM Capital Blog readers,

In this weekend’s blog edition we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of March 16, 2015:

• China’s Stocks on 7-year High.
• EU losing patience with Greece.

CHINA’S STOCKS ON 7-YEAR HIGH:
As can be seen from below chart, China stocks powered higher on Friday, posting their biggest weekly gain in three months and hitting a fresh seven-year high.

The Shanghai Composite Index CSI-300 advanced 1.38 percent on Friday March 20th, to close the week at 3,892.57, its highest level since April 2008 as can be seen from below chart.

• Air China Ltd. and China Southern Airlines Co. rallied by the 10 percent daily limit. Carriers surged on speculation that falling oil prices will boost earnings.
• China Railway Construction Corp. and China Railway Group gained at least 5 percent after the China Economic Weekly reported the government is studying a merger.

Below chart shows that the CSI-300 Index has risen 85.32 percent during the past 12 months.

Trading volume, which touched two-month high last week, continued to expand, as investors regained confidence after Chinese Premier Li Keqiang vowed on Sunday to support the economy.

Based on Friday, March 20 closing value, the Shanghai stock index is trading at 13 times estimated earnings for the next 12 months, versus a multiple of 19.90 for the Standard & Poor’s 500 Index.

The Chinese market’s US$5.8 trillion value makes it the second-largest worldwide after the U.S., which has a market capitalization of US$24.5 trillion.

EU LOSING PATIENCE WITH GREECE:
On Thursday, March 19, Euro zone leaders told Greece, that time and patience are running out for its leftist-led government to implement agreed reforms to avert a looming cash crunch that could force it out of the single currency.

Greece has been kept from bankruptcy by two international bailouts but now risks running out of money within weeks if it does not receive more funds. Greek banks reported the largest deposit withdrawals in a month, a sign savers are worried about the outlook for the country’s finances and institutions.

Greece prime minister, Alexis Tsipras is meeting with European Union leaders to end a stand-off over extending financial aid for the country, a situation that Kazimir likened to a “Cold War environment.”

Greece Bond yields jumped to their highest in almost two years after the European Central Bank granted Greek officials only part of their request for more emergency funding. The country could run out of money this month as debt payments and monthly salaries and pensions come due.

PGM CAPITAL COMMENTS:

CHINA’S CSI-300 AT 7-YEAR HIGH:
Although the Chinese Index has appreciated with more than 85 percent it still has a valuation of 13 times earnings which makes it much cheaper than the USA broader markets which are currently trading at a multiple of 20 times of next year earnings.

Besides that most Chinese big caps are currently trading at valuations below 10 times next year earning and are paying a very healthy dividend with yields over 4 percents.

When we compare the performance of the CSI-300 with the DOW-30 over the last 10 years we see that the Chinese CSI-300 has outperformed the USA DOW-30 with more than 4 times as can be seen from below chart, in which the blue line shows the 10-year chart of the CSI-300 and the red line the one of the DOW-30.

Considering the fact that during the last 10 years the Chinese Yuan has appreciated against the US-Dollar, the performance of the CSI-300 -which is measured in CNY -, compared with the DOW-30 – which is measured on US$- is even more robust.

Below 10-year chart shows the appreciation of the Chinese Yuan versus the US-Dollar over that period.

Below 10-year chart shows the performance of the Chinese CSI-300 versus the German DAX-40 Index

When we take into consideration that the EURO has depreciated with approx. 30 percent during the last 10 years, against the Chinese Yuan, as can be seen from below chart, we can draw the conclusion that the performance of the CSI-300 -which is measured in CNY -, compared with the one of the DAX-40 – which is measured in EURO – has been over 400 percent.

 

GREXIT:
Euro-region finance ministers are urging the Greek government to draw up a rigorous plan to fix their economy so the bloc’s taxpayers won’t balk at further support.

It is also word mentioning that, the following two taboos about Greece’s future as a member of the Euro club were broken last week:

1. The German finance minister,Wolfgang Schaeuble all but invited Greece to return to the drachma.
2. The Dutch finance minister, who heads the group of euro area finance ministers floated a temporary ban on Greeks’ taking their money out of the country.

An opinion poll of German TV station showed on Tuesday, March 17, that a majority of Germans – 52 percent – would like Greece to leave the euro zone, up from 41 per cent in February of this year.

This is a message German canceller Angela Merkel understands. She has never acted against opinion polls in the past–but she also wants to keep the Euro zone intact.

The bond vigilantes are giving Greece a huge vote of no confidence, doubling the country’s 10-year yield in the past six months and driving its three-year borrowing cost to a frankly unsustainable 23 percent, as can be seen from below chart.

At that level, investors are signaling genuine concern that the country won’t be able to pay its debts and can’t retain its membership in the single-currency club.

Until next week.

Yours sincerely,

Eric Panneflek