(MENAFN- Khaleej Times)Last week was financial bungee jumping in Europe and global shares. It did not surprise me that Germany's DAX index dropped 20 per cent from its peak since its blue chips have 10 per cent of their sales in China. Yet Italy's MIB sales exposure to China is minimal but it was the ultimate "mamma mia" moment in the Milan Bolsa once the People's Bank devalued the yuan. Norway exports almost nothing to China save herrings/salmon (0.6 per cent China sales) but the Oslo's OBX's oil/shipping/tanker exposure led to its traumatic falls. Even Roche the world's finest oncology Big Pharma slumped to 250 Swiss francs in Zurich. The message is unmistakable: European equities forecast an imminent recession. Yet the Euro Area Composite PMI was 54 in July. The oil crash is a windfall for the Old World (ex-Vikings of Norsk) and Dottore Draghi's monetary bazooka is firing live rounds.
For now the plunge in Bund/OAT/gilt yields means no safe-haven trade is in bond proxy utilities and consumer staples companies without an emerging markets footprint. Thus no Nestle. No Unilever. No Danone. Volkswagen has fallen almost 15 per cent and now trades not much above my ?150 target from two weeks ago. Investors will not be reassured by central bank easing in China as long as deflation risk looms. This is an eerie echo of Japan's two lost decades when the Nikkei Dow tanked from 40000 in 1990 to 8000 on the eve of Shinzo Abe's election in 2012. Even at the Euro Stoxx 360 I am reluctant to bottom fish in Europe since I believe we could well revisit "taper tantrum" levels near 280-300 in June 2013. Valuation metrics mean squat when EPS growth and RoE will begin to sag. The European equity risk premium has spiked to 8.2 per cent when Europe cannot will not and has not avoided contagion from a China hard landing. In Frankfurt and Stockholm the correction has morphed into Mercado Ursa which is definitely not a mall on Jumeirah Beach Road in Dubai! The Stoxx Europe now trades at 14 times earnings but consensus EPS growth is optically high. I am looking for cheap megacaps with fortress balance sheets share buybacks and juicy dividends in property media Big Pharma healthcare software and insurance. European exporters have faced a double whammy since the Chinese yuan devaluation coincides with the mother of all short euro covering trades. As risks spasms convulsed the financial markets carry trades were unwound. The euro was the ultimate funding currency since summer 2014 when Dr Draghi exorcised the demons of the Bundesbank hard money zealots and I begged my friends and readers to short the euro at 1.3650. So the world was short euro when risk went ballistic - and the euro spiked to 1.16 a bloodbath for European indices. Ivan Boesky's mantra was "greed is good"; mine is "angst is gut". So achtung baby ich liebe the DAX with its 8.5 per cent equity risk premium and generous dividend yield. Surely there is value in Daimler at a 5.8 per cent dividend yield and seven times earnings despite China risk at ?65? Or Allianz at ?135 Credit Suisse at 25 Swissie Barclays at 245 and Lloyds at 75? I used to trade the DAX at a 10 per cent premium to European equities before the 2010 Greek debt crisis. Now the DAX trades at a 24 per cent discount. An obvious macro pair trade with Sweden at 16 times earnings. Italian banking is a safe-9haven theme. I doubt if the money changers of Milan and Venice have lent to Asia since the time of Marco Polo. Italian banking can deliver 15-18 per cent earnings growth and is a proxy for Matteo Renzi's restructuring. MSCI Europe Financials now trades at 0.8 times book value though I concede the Old World bankers are uniquely gifted at destroying book value since the time of Lorenzo di Medici down to Marcel Ospel at UBS. Note StanChart has traded down below my short target to 748 pence. No interest duckies capital raise risk too great but HSBC is a steal at 500 pence BNP at ?48 ING at 12 gilders and Julius Baer at 45 CHF.
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