Citigroup reiterates its “Overweight” recommendation for the Israeli market in its latest “CEEMA Strategy Notebook”, entitled “Don’t panic”. The bank says, “In the eye of the storm. The sell-off in global credit markets may continue in the near term, but a full-scale collapse in risk appetite toward emerging markets looks unlikely to us. We still believe in global growth and recommend using recent market weakness to add to underperforming markets.”
Citigroup says, “It must nevertheless be said that, relative to prior episodes of global risk aversion, emerging markets have held up better - so far - than usual.” The bank believes that, “Although there is no doubt that a serious US economic downturn would pose a threat to emerging market economies, the current scenario -marginally weaker US growth, probably associated with more accommodative US monetary policy - is hardly insurmountable for emerging markets.”
Citibank concludes, “As we see it, the global storm may continue for some time, but this spike in volatility indicates to us that we could be nearing a low point in sentiment... and prospects for the CEEMEA region are unlikely to be significantly impaired unless we get hit with either a truly prolonged bout of market turbulence that siphons off capital flows significantly, or a deterioration in the outlook for the global economy neither of which we anticipate. We thus see CEEMEA equities ending the year higher than they are today. The facts remain: Earnings growth is ongoing, valuations are at sustainable levels, foreign corporations continue to seek out emerging markets assets, and global interest rates may no longer be rising. Not a bad scenario.”
Citigroup has revised its recommendations for a number of emerging markets: Poland and Hungary have been downgraded to “Underweight” and “Neutral”, respectively, Russia and South Africa have been upgraded to “Overweight” and “Neutral”, respectively; Israel and Egypt have been kept at “Overweight,” and Turkey kept at “Underweight”.
“Although the Israeli market has outperformed in the sell-off, the market has still been weaker than we would have expected. The currency in particular looks oversold in our view. With strong economic fundamentals, the shekel looks to be one of the more attractive emerging market currencies, and may benefit from the expected closing of the interest rate gap with the US if rates begin to fall there. Following the discontinuation of coverage of Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA) we have added Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR; LSE:PCCD) to our Focus List alongside Bank Leumi (TASE: LUMI) and an especially oversold Makhteshim Agan Industries Ltd. (TASE: MAIN).”
As for the US, Citigroup says that the Federal Reserve Board’s August 7 decision is evidence that monetary policy is reacting to market signals. The bank predicts that the Fed will cut the US interest rate by 25 basis points to 5% by year end, less than market expectations of a 50 basis point cut to 4.75%.
Morgan Stanley in its “Weekly International Briefing” asks: “Do the dramatic events in European and US money markets over the last few days and the central bank responses to them signal a peaking in these pressures or are they an ominous harbinger of further turmoil?”
The bank answers: “While the market environment seems likely to remain fluid and volatile, we reached the following tentative conclusions:
- “In the short run, money markets will be volatile, but strong precautionary demands for liquidity seem likely to persist, sustaining money market pressures. Central banks will accommodate them aggressively to dampen them.
- “Investors are beginning appropriately to discriminate among financial assets, with good credits hit less than bad, stronger countries less than weaker ones, and currencies more stable than bonds and equities.
- “The jury is still out on the potential economic fallout resulting from this tightening of credit. Although we expect the direction is down, we think the global impact will fall well short of recession.”
The bank concludes, “Our conclusion is that the short-term turmoil in money markets in particular and in the risky asset market as well, is not over. Central banks have acted aggressively to contain problems, limiting the downside risks. However, reestablishing liquidity and availability in the money market will take more time. Outside of money markets, we see assets increasingly being priced on the fundamentals of the different instruments. The degree of disturbance in a market is directly related to the connections between these markets and the US and/or European money markets. The farther - in terms of both asset class and country - from dependence on European and US money markets, the more stable a market is likely to be. Importantly, overshoots in pricing are highly likely; while they may create a sense of deepening problems, such price actions will - eventually - create opportunities.”
Published by Globes [online], Israel business news - www.globes.co.il - on August 13, 2007
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