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The European tigers?

One analyst sees some interesting similarities between the state of the Asian tiger economies in the late 1990s and Europe's peripheral nations today - and an opportunity for some upside. Also, FirstEnergy's 2013 picks in the small cap space

When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at mfawcett@albertaventure.com

Jan 10, 2013

by Max Fawcett

For all the Sturm und Drang about the imminent death of the Eurozone, most of the major bourses on the continent – even ones in the hardest-hit peripheral countries – were actually up in 2012. To wit, the iShares MSCI Spain Index ETF (NYSE:EWP) and Italy Index ETF (NYSE:EWI) are both up more than 40 per cent from their July 24, 2012 lows. But despite the fact that ECB president Mario Draghi held the central bank’s key rate steady and didn’t announce any other additional stimulative measures in today’s policy statement, Ruchir Sharma, the head of the emerging markets equity team at Morgan Stanley Investment Management, thinks there’s still some upside to European equities.

He compares the situation in peripheral Europe to the one he saw in the so-called Asian tiger economies in the late 1990s when he was working in the region. “Economic activity is so depressed in peripheral Europe, with industrial production down around 25 to 30 per cent from the peak levels, and that’s very similar to what we saw in east Asia,” he told BNN in an interview earlier today. He concedes that the macroeconomic conditions are far more challenging in 2012 than they were in 1997 and 1998, and that countries like Spain, Italy and Greece don’t have the same option of devaluing their currencies that many east Asian countries turned to in order to get their economies moving again. That said, he is still seeing the same telltale improvement in current account balances in peripheral Europe (some are in surplus territory now) that he saw in Indonesia, Thailand and other beaten-down east Asian economies right before they bounced back, something that he describes as “a major development.”

He doesn’t think the rebound will be as robust in Europe as it was in Asia, but he says the lingering pessimism about the region, despite the recent run-up in equity prices, suggests there’s still value to be unlocked by courageous investors. “A lot of people are very dismissive of it, thinking that it’s a reflexive rally and there’s nothing in here to suggest a turnaround in fundamentals,” he said. “[But] I think there’s a lot of relative value which is emerging in Europe.”

Closer to home, Bonavista Energy (TSE:BNP) finally announced the long-rumoured dividend cut that investors were betting was needed in order to get its finances back in order. The company cut its monthly dividend by 42 per cent, reducing it from 12 cents per share to seven. FirstEnergy thinks the decision was a prudent one, noting that it reduces their forecasted 2013 cash use to cash flow ratio from 132 per cent down to 110 per cent, while also reducing the ongoing dilution of existing shareholders that’s a product of its DRIP plan. It trimmed its price target from $20 to $18 per share.

FirstEnergy’s top ideas for 2013 in the small cap space, meanwhile, include a few popular names and a couple of wildcards. Cody Kwong likes Painted Pony Petroleum (TSE:PPY) and puts a $17 price target on its shares, noting that “With the Progress/Petronas transaction finally coming to a close, we believe this paves the way for further highly selective consolidation by SOE and non-SOE’s in the immediate regions of Cameron/Kobes/Blair/Town region of NEBC. Those companies looking for highly contiguous tracts of land in areas already delineated as hosting amongst the most prolific Montney gas resource in the basin and situated within the most favorable royalty window in NEBC will arrive at Painted Pony as being the company that fits this bill the best.” Kwong writes that Painted Pony’s pristine balance sheet and productive light oil assets in Saskatchewan will help it weather any market volatility or regulatory uncertainty until the right bid is finally tendered.

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Robert Fitzmartyn likes Raging River Exploration (CVE:RRX), a Viking and Dodsland-area play with strong operational economics and leverage to light oil. “As a steward of investor’s capital, this management team is at the top of our list in terms of efficient capital deployment,” he writes, “and we continue to see Raging River as the logical aggregator of assets and believe the market will support its ability to execute accretive acquisitions.” He also likes RMP Energy (CVE:RMP), whose small acreage at Ante Creek is, in his opinion, the best in the entire play.

Finally, Katrina Karkkainen throws in with delightfully-tickered Yoho Resource (CVE:YO), a company with a presence in the Duvernay that she believes makes it a logical take-out target. She has a $4 price target on its shares.

 

 

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