National Bank of Greece ADR (fka NBGGY)

[Jester_Vandalay]

2011 – Living in hope

For the start of 2011 we believe the markets will live in hope that the momentum of global economic growth built in the fourth quarter will carry us through the year, overcoming all problems. By the end of 2010 we would have hoped that the world’s problems would be resolved. However as we turn the corner into 2011 many issues remain unresolved and indeed further problems have been added to the list of structural and cyclical issues that confront the financial markets. As the year progresses we believe that the markets will still have to confront the structural issues in the world - high consumer debt in the West, commodity price inflation, political disarray in Europe and a still weak financial sector in Europe and the US. At the end of 2011 many of the issues may remain unresolved however it should not have stopped investors from making some modest gains in equities and commodities in particular.


Strong US economic data in the fourth quarter of 2010 has set the scene for an optimistic opening to 2011 for the financial markets. Many of the US economic indicators for the manufacturing sector are showing a vibrancy not seen in some years. The near term outlook is helped by generally stronger economic growth in many parts of the world through the fourth quarter. Even in Europe as the year closed the weakness of the Euro is providing a timely support for the core of Europe with Germany and France reporting cycle high industrial confidence and strong corporate profits growth.


For 2011 to be a resounding success in the financial markets requires investors to believe in the sustainability of the global economic recovery. A second half to 2011 that is resplendent in US growth is still a leap of faith. The structural problems of the old world of the West have still not gone away. The US housing market is still mired in problems with a general lack of confidence in housing as an investment, a lack of available funds in the mortgage market and higher mortgage rates all working against the US housing market. Part of the problem of the housing market is the lack of jobs growth and the still high levels of unemployment in the US. Without good employment prospects, fewer people are prepared to buy new home or upgrading their existing home. Without additional demand for residential properties house prices will remain mired at around current low levels. As the year ended there was some good news from the jobs market with US initial jobless claims falling to the lowest levels since July 2008.


The demise of the Eurozone as a cohesive economic zone remains one of the significant unresolved issues for 2011. The Eurozone has bought time with a series of short-term measures to bolster individual countries aka Greece and Ireland. However there will be a considerable challenge to the Eurozone in the first half when over €500 billion of government debt comes up for refinancing. If the Eurozone were a truly integrated economic zone transfers of funds across borders would provide significant relief for countries that have suffered economic melt-down. In the current situation individual countries have to fend for themselves with only the support of soft guarantees that have a finite time limit. A significant political chasm has opened up between Germany and a number of the other countries as Germany has baulked at committing too much to the countries in trouble. Spain may end up being the acid test of the union in the Eurozone. Over the coming couple of years BNP estimate that Spain will have a financing shortfall of €340 billion. In a crisis the IMF and the Eurozone could probably make good the financing over the next two years but at the cost of considerable political turmoil in Europe and generally higher long term interest rates for the region.


A strong global economy works hand in hand with a strong financial sector. However as we enter 2011 doubts remain about the strength of the US and European financial sectors. If you look back at 2010 many of the major US banks performed poorly weighed down by ongoing issues such as their mortgage books, the capital requirements of the Basle III initiative and a general anti-bank attitude from the legislators. European banks will have to refinance around €400 billion of debt in the first half of 2011. Indeed both the ECB and the Bank of England have warned that the banks will be competing hard for funds in early 2011.


We expect commodity prices to head higher in 2011. In the oil market, global demand continued to accelerate through 2010 as strong emerging market was increasingly reinforced by strong developed market demand as the US economy strengthened. Aggregate demand is running at close 1m barrels a day (b/d) higher whilst aggregate supply growth has risen by a modest 250,000 b/d year-on-year. In agriculture the weather has played havoc with 2010 forcing prices higher and with inventories consequently low further price spikes are possible. Also the scare of the price increases in 2010 is leading many companies and countries to increase strategic stockpiles of agricultural product that may lead to even greater volatility than seen in 2010. In industrial metals stronger global demand is meeting in many instances still well supplied markets. Aluminum, Nickel, Zinc and lead are all expected to see strong supply growth in 2011 possibly outstripping demand growth.


Higher commodity prices could provide quite a challenge for central banks in 2011. In many parts of the world current inflation is running well ahead of central bank targets causing a dilemma for policy makers. If central banks do nothing they may be accused of being weak in the face of the risk of persistently high inflation. If they increase interest rates they may risk tightening too early and killing off the nascent growth.


As we enter 2011 we remain positive on equities and commodities. In equity markets we are indifferent between emerging markets and developed markets. Developed markets may have the upper hand initially as strong corporate profits growth for the fourth quarter and still low valuations provide support. Emerging markets, have strong long term growth prospects, however they face inflation risks that will require ongoing restrictive monetary policy for 2011. Commodity markets as we argued earlier, offer good near-term returns particularly in the sub sectors of energy and agricultural product.


MENA markets have considerable upside should a more sustained rally occur in global financial markets. Valuations are low and the markets have generally been overlooked by international investors. The main challenge will come from ongoing refinancing of companies. As long as global liquidity remains available the outlook should be a positive one. If the global bond markets hit a more significant problem with yields spiralling higher then returns could be more modest.


The most challenged asset will be developed market bonds. Stronger growth and inflation coupled with the current wave of refinancing has forced yields higher. Central banks will be mindful that although some of the increase in bond yields is a positive reflection of a more robust global economy, were rates to move too high global growth prospects could be compromised. Central Banks will probably aim to use quantitative easing to restrain too significant a sell-off of bonds.


News Link