Be bullish on mediocre Italy
As 2011 began, I predicted stocks likely to be choppy but flat - just what happened in 2011. Now, I'm super bullish for 2012 - stocks should be up big, much bigger than most can fathom. Folks are too dour and can't see how strong fundamentals are globally. What's more, everyone expects Italy to be a disaster - it won't be.
Folks still fret the PIIGS, but make no mistake, the 2012 issue is Italy. Of now-issued PIIGS debt that must be rolled over in 2012, 60% is Italy's (about €331 billion (£275 billion)). Greece, Portugal and Ireland are bailed out and aren't having debt auctions. Spain has a big chunk, about 26% of PIIGS debt (€142 billion).
But even if all rolled over at 7% (unlikely), the increase in debt costs would be about €4.3 billion, or just 0.4% of Spanish GDP - not much. They can handle rates that high or much higher. Plus, Spain's debt as a percentage of GDP is half Italy's, and its debt interest costs as a percent of GDP is 5% - less than half the cost during the mid-1990s - a perfectly fine time for the economy and stocks - and lower than America's 9% level and Italy's 10% level.
It's all Italy. But Italy makes or breaks key funding hurdles early in 2012. Of their now-issued debt, 43% matures in February, March and April. In February alone, it must roll over €53 billion. If those auctions go fine, investor fears will likely fade fast, boosting stocks.
What's more, these auctions needn't be spectacular. Expectations are for relative disaster. Anything better will be an upside surprise. The less disaster-like, the bigger the surprise.
Keep in mind too, the European Central Bank (ECB) has been buying Italian and Spanish debt in the secondary market, which helps keep debt yields lower. And the ECB has been relatively restrained in expanding its balance sheet since 2007 - it has room to buy much more debt and push yields down more - positive for Italy.
Investors may be tempted to wait until May for clarity. Total mistake.
People have a hard time with this - markets move first, they don't wait for clarity. Clarity in capital markets is über-costly. The best recent example is Y2K. Remember Y2K? There was near-universal fear all during 1999 that on January 1, 2000, there would be severe economic fallout from widespread malfunctions tied to computer systems rolling from "99" to "00." No one was saying Y2K would be fine - but stocks knew well before it would be a non-event. In just the fourth quarter of 1999, while folks stockpiled canned goods and cash (for fear ATMs wouldn't work), world stocks boomed a massive 19%. If you waited for clarity, it was too late.
This is a universal truth, and will be true about Italy's debt auctions. The sentiment boost from a better-than-expected outcome will come well before clarity, not after. Don't wait. Be bullish now and for all of 2012. Think big. Expect bigger. Start here:
Love a juicy scandal? Accusations of money laundering and political palm-greasing helped implode high-tech Italian aerospace firm Finmeccanica down 70% in 2011. Because it's 30% owned by the government there has been a lot of pushing and punching over the stock. It's insanely cheap at 8% of annual revenue. By 2014 you will see profit progress in its highly engineered military aircraft, artillery, armoured vehicles and communications equipment.
Braskem is South America's largest chemical firm, including the whole market for Brazil's ethylene, propylene and polypropylene. It's really a big play on PVC in Latin America. PVC piping is used in irrigation, sewage and water services - all essential to emerging growth. It's cheap at nine times 2012 earnings.
Chile's LAN Airlines is one of the largest air carriers in South America. It links South America to the Pacific Rim and North America. Passenger miles grew 14% in 2011. It's a buy at 11 times my estimate of 2012 earnings - and 1.5 times sales.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
