It seems fitting that the quote used for this week’s title comes from Winston Churchill late in WW2; given the apt comparisons between Ukraine’s war time President Zelensky and Britain’s wartime PM, it resonates even more.
But my usage stems from the thought that amidst all the negative headlines and volatile cross market action we, as investors, should look for the silver lining and make use of the crisis mode markets find themselves in.
And not just investors but also companies, countries and regions. The first example that comes to my mind is Europe, which as we have written previously, is using this crisis to very good effect indeed, moving at speed on issues like defense and energy security that Russia’s invasion suddenly exposed as glaring fault lines across the continent.
Europe is often criticized for its slow moving nature (takes time to get 27 countries to agree) but it also has a history of responding well to crisis. Today it seems that Europe offers investors both a tactical opportunity as well as a strategic one. The tactical one is simply that European financial assets are being given away for dirt cheap. The Euro is under 1.10 to the USD while folks rail about the need to diversify FX holdings, EU banks sell at 50% of book vs 1.5-2x for their US counterparts. BofA reports record (off the chart) outflows from EU equity funds while EU stocks sell at near record discounts to US equity & price in zero EPS growth according to MS. (See my Monday dialogue with BTV’s Jon Ferro here on the appeal of EU banks vs US oil majors with an ST RSI over 80).
Obviously, there is a war going on in Europe and so some weakness is to be expected but the lazy thinking and extrapolation of energy price spikes that get so much attention on the way up but none on the way down (Dutch Nat gas prices off 33% in a week – see any EU Nat Gas bear market headlines – no, didn’t think so) suggests opportunity. This is especially true if there is a near term resolution in the Ukraine – something that seems likely to us given Russia’s lack of success on the battlefield, growing domestic discontent (how many Russian protesters will be arrested this weekend) and rising economic costs as the excision of Russia from the global economy has proceeded in an unparalleled fashion. As noted last week, time is not Putin’s friend and as every day passes that becomes more and more clear.
Markets hate uncertainty and when the uncertainty lifts expect a rapid reversal in the most heavily sold segments like European equity. It’s a technical market for sure and global stocks are in never never land but note the VIX finally broke below 30 for the 1st time since Feb. 25th.