Figure 1 all roads lead from Rome

Source: FT

I must confess to not having expected the Italian imbroglio to become the lead story and, of course, that status may not last for long. However, looking at the sea of red on so many different screens it is hard to avoid. Figure 1 is the most dramatic depiction of one of the immediate consequences as the yields on 2-year sovereign bonds (BTPs) head into the stratosphere after being consistently negative since April 2017. Yesterday the 6-month auction was only just fully subscribed at 1.21%, the first positive rates on this maturity since September 2015. Less dramatic graphically but much more significant is the return of discrimination against so-called ‘weaker’ sovereigns ( notably Spain and Portugal) and the renewed plunge in bund yields as investors buy German assets as a hedge against the collapse of the Euro Area. The euro itself, which has been on the wrong end of a strong dollar for much of 2018, has taken another beating, as have most other European currencies. In equity markets the contagion appears to be global or at least it was yesterday. For investors there appear to be three initial conclusions:

  • Italy has a political crisis. President Mattarella on behalf of the establishment did act constitutionally but has raised the stakes by making EA membership sacrosanct. The Lega, who have clearly been plotting something on the euro (perhaps as simple as angling for debt forgiveness) can now sign up the more hesitant Cinque Stelle in a new election campaign against the establishment. This crisis will run and run and prices of Italian assets will continue to suffer.

 

  • Germany and France have financial exposures to Italy (via the ECB’s QE programmes and its Target 2 System plus the potential Italian loan losses of their banks) that are likely to fuel a political  crisis in the EA and wider EU. Germany and France took no prisoners when dealing with Greece, Ireland and Portugal but a populist Italian government will be hard to overcome. Some European assets, including the euro, may look temptingly cheap but should be more carefully assessed on their individual merits.

 

  • Global investors continue to be very nervous. The imbroglio has given an opportunity to sell risky stuff and pile into safer assets such as US Treasuries, Bunds, the dollar and the yen. However, a political crisis in Italy and yet another potential Euro Area crisis are not enough on their own to cause a global crash. Bargains may well appear while some safer assets could become over-priced.

Alastair.winter@danielstewart.co.uk Chief Economist

Figure 2: DIY disasters and Kingfisher

Source: Google Stock Images

You will be glad to know that the above images are not from my personal collection.  However, no matter how much you have struggled with your own DIY excursions this Bank Holiday weekend, you will not be able to beat the disaster of the near A$1bn losses generated by Bunnings of Australia in the couple of years of their Homebase ownership which came to an ignominious end last week.  As Bunnings slide back Down Under, Kingfisher (KGF) have had their position as the number one UK DIY company reaffirmed, a reality which has helped their shares rise over the last week, despite a patchy trading update.  In addition to a little less competition – the new private equity owners of Homebase are likely to close some stores – the better weather of recent weeks compared to the cold and wet first quarter will encourage others to…try their own DIY experiments.  Thankfully Kingfisher’s brands also include Screwfix…which supplies the professionals, whom you can call in if you get the wrong side of a domestic bodge job.

Chris.bailey@danielstewart.co.uk Chief Investment Officer

www.dynamicopportunitiesfund.com which owns shares in Kingfisher.

Figure 3: Veltyco Group: Worth Watching

Source: Bloomberg

Veltyco (VLTY.AIM) is an established gaming industry online marketing company which floated in 2016 via a shell and is now capitalized at £55.4m. Its strategy is to focus on generating marketing leads for the activities of various partners in the gaming industry and leverage the resulting cash generative activities to expand its own regulated online casinos and sports betting brands. This strategy should be accelerated by the recent £4M acquisition of Marsovia, which has a readymade database of approximately 43,500 customers to be targeted in the imminent launch of branded  casinos and sport betting. The deal complements the 51% investment made in the Bet90 Sports Ltd, an online book maker with a large verity of casino games and the sponsor of one of the largest Brazilian Football Federations. Veltyco’s finals to the year-end December 2017 are due to be published shortly including its own online gaming brands. In February, trading was reported to be in-line with expectations, anticipating net revenues of more than €14.5 million (2016: €6.1m) and operating EBITDA for the full year 2017 in excess of €8 million (2016: €2.1m). This translated to a profit of around £6m for an EPS of 7.4p giving a prospective P/E of 10x. Net cash was £1.0m at the six months to June and should have increased depending on the cost of the brand launches. The changing UK regulation for online betting adds an edge of caution but may also produce opportunities. Worth watching, indeed

Jon.levinson@danielstewart.co.uk Corporate Broking

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By Alastair Winter

Chief Economist at Daniel Stewart

alastair.winter@danielstewart.co.uk