Wednesday, April 11, 2007

Eurovision Winner
The nice table was nicked from a popular blog by Paul Kedrosky. It is highly significant that the market cap of Europe has now gone past the US. Usually these sort of things indicate a deeper under-current and long term trends. The Euro-zone economies should grow at about 4.2%, assuming 2.2% inflation in 2007. US GDP may grow at 2.2%. This rate is not just for 2007 but if you have a look at the past few years, the differentials are there already.
In Europe you have pockets where growth is huge and others a bit more sedated. These pockets of economy operating at various stages of an industrial life cycle affords the region a lot of room to manouvere. Outsourcing becomes a higher art form. Assuming Europe’s biggest companies grow profits at 8% in 2007, there could be a 12%-14% rise for the S&P Europe 350 this year. At the same time, big companies are putting more money into dividends, buybacks and acquisitions than capital expenditures. While the same thing is happening in the US as well, a lot more "market cap" has been taken off the table by the huge private equity firms. Hence, seen in that light, the market cap thingee may not be a very good indicator as chances are very high that these privatised companies will return to exchanges within a few years after being retooled.
The shift in market cap is also due to the weak US dollar as the market cap is calculated in US dollars. Even if everything stays the same, the US dollar would be depreciating at least 2% or more a year for the past few years, and probably for the next few years.
That being the case, there is another underlying factor which would have shifted the European figure even faster - the fact that there is much higher proportion of companies being listed in the US than Europe. In Europe a large portion of big lucrative companies are still held privately. If that factor is equalised, European market cap would have gone past the US a few years ago. The long term trend has been set a couple of years ago and not just now. Europe will be a more important center for fund and capital raising vis-a-vis the rest with London taking an increasingly important stature as "the" financial center that matters.

3 comments:

SAMMY MU said...

European stock markets and economies are indeed stronger than those in the U.S. lately. European bourses have eclipsed the U.S. markets in total market value by some measures.

Wonder how Malaysia stands vis a vis with her neighbours?

p.s. euphoria seems to be fading out today

Salvatore_Dali said...

for those who are interested in rb land bhd, pls read the updated article for a clearer perspective

mj said...

Thank you for your analysis on RB Land Bhd. The "boy wonder" currently trades at 31% discount to its RNAV. This is unjustified, given its upside potential and corporate exercise. If the RNAV is at RM1.80 and the market is currently pricing it at RM1.25, then it can be said that we have encounter a cheap bargain. So with the current market profit-taking activities, I'm thinking of the margin of safety concept (as pointed out by your goodself)!