By Robert Cole and Jeff Glekin

The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

Emerging-market investors seem to get hit by trouble near and far. They suffer when euro zone troubles erode investment confidence generally. But they also have their own particular concerns about a slowing China and an intensification of resource nationalism.

The outperformance of emerging market equities can no longer be taken for granted. Over the last three years, they have lagged developed brethren by about 8 percent. Total returns were only just positive, while developed-market stocks were up a little over 10 percent.

Slow or no-growth European economies reduce demand for emerging-market exports. If Europe’s currency breaks and its banks get crunched, demand for goods and services is almost certain to fall. Thanks to the hard-wired interconnectivity, financial stocks could be hit more directly. And financials make up a greater proportion of market values in the emerging market indexes – 24 percent versus developed markets’ 18 percent.

Now factor in conventional emerging-market worries – breakneck growth ending in a hard landing, and unpredictable governments. China is slowing, resource nationalism has flared up in Argentina. There’s even an acceptance that demand for mineral wealth won’t increase forever. Comments on May 16 from Jacques Nasser, chairman BHP Billiton, the world’s biggest miner, crystallise such fears.

India’s rupee is at an all-time low. Imports have jumped by 38 percent year on-year, driven by the higher cost of oil. There’s still no sign of a competitive exports sector beyond IT outsourcing. The current account deficit is at its highest since 1980, when the International Monetary Fund starting collecting data.

By Robert Cole

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

It’s hard to be bullish about European equities. The economies look weak both inside and outside the euro zone and the single currency’s crisis only seems to get worse. But the share prices may be discounting even more bad news.

The STOXX 50 index of leading euro zone shares has lost all the tentative gains made in the first part of this year and is standing at not much more than half the level of five years ago. The total return since then, including reinvested dividends, is a depressingly high loss of 35 percent. In the United States, the total return of the S&P 500 over the same period is slightly positive.

Some underperformance is justified by Europe’s weaker economic performance and by the euro zone’s problems. The relative weakness on the eastern side of the Atlantic is reflected in earnings expectations for 2012. Thomson Reuters data indicate a 5 percent gain in the euro zone and 10 percent in the United States. The most recent economic news suggests the gap could widen.

But European share prices may reflect too much pessimism. European equities have usually been cheap by American standards; right now the discount of forward earnings multiple is above the post-1987 average. And not only is the 9.5 price-earnings ratio one-quarter less than the equivalent U.S. figure, it appears to discount no earnings growth at all in the next five years and no increase in valuation.

There could be big rewards for those brave enough to buy. If euro stocks’ earnings rise at half the post-2005 annual rate of 10 percent over the next five years and p/e ratios move only halfway back to the long term norm, then investors will earn inflation-adjusted annual returns of 11.6 percent.

By Robert Cole

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The deal struck between the UK government and its Royal Mail postal service should have other pension bosses drooling. What’s not to like about an arrangement that sees the state take on responsibility to pay ex-employees’ inflation-proofed retirement incomes far into the future?

The Royal Mail is getting rid of future liabilities with an estimated present value of nearly 38 billion pounds at a cost of only 28 billion pounds – the value of the assets in its pension fund. In a neat sleight of hand, the UK government also seems to benefit. It can use those assets to offset about 2 percent of the national debt, while ministers get to bury the index-linked liability deep in the budget books.

In accounting terms, this looks aggressive. One fig leaf-sized justification for glossing over the liability is that it is hard to estimate the present cost of paying long term retirement incomes. Another is that the government doesn’t assign a precise cost to the future pensions of the UK’s public servants, either.

To be fair, the UK government may appreciate the illusory nature of what George Osborne, the chancellor, chose to call a “windfall”. It also deserves grudging credit for honoring its obligation, as the ultimate owner of the Royal Mail, to finance pension promises. The deal also paves the way for a sale of the postal service, which could see the British treasury recoup some cash. And many enterprises have thrived once freed from the shackles of state control.

But the purest test might be how private-sector managers of underfunded pension plans would react if offered the same deal – and they’d be queuing all along Downing Street. And where the Royal Mail paid the bargain basement equivalent of 75 pence to slough off each pound of liability, others would be prepared to pay much closer to a full price to get rid of the inflation-linked risk.

By Robert Cole The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Some nice round numbers have equity investors smiling. The Dow Jones industrial average crossed the 13,000 level for the first time since before the crisis and Britain’s FTSE 100 index is headed towards 6,000. Many in the market may be wondering if the run can be sustained. But the real danger may be lurking for bondholders.

The FTSE 100 index crossed 6,000 for the first time back in April 1998. It has risen through the mark and slipped back below it 41 times – not counting the occasions it flip-flopped during intra-day trading. In that context, investors might wonder if the event is even worth marking, let alone celebrating.

The warming U.S. economy, coupled with encouraging news on the European front, accounts for much of the renewed confidence. Investors are also attracted by what looks like discounted value. In the United States, the multiple on the more broadly based S&P 500 index, at 12.5 times forward earnings, is below the 25-year average of 15. The UK equivalent is 10.2 times. The first time the FTSE 100 hit 6,000 the forward price-to-earnings multiple was 18.9.

If recession hits and corporate earnings decline, hindsight will reveal the major indices to have been deceptively cheap. Any remaining potential upside, meanwhile, may do little more than compensate for the inherent risks in stocks. Debt markets, however, look more precarious.

Yields on 10-year bonds issued by the U.S. and British governments are still settled around 2 percent. That suggests debt instruments are as dear as they have been at any time in modern market history. They also offer little, if any, protection against inflation.

True, monetary policy on both sides of the Atlantic is about as lax as could be. What’s more, the Japanese precedent shows that bond yields and equities prices can stay persistently low together. But any feelings of vertigo by equity investors are probably misplaced. It is expensive sovereign bonds that are more likely headed for an overdue fall.

By Robert Cole

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Blue chip European stocks and well-rated bonds have started the new year in pretty fine fettle. And they’ve not turned turtle despite gloomy news from S&P, and the Greek debt restructuring drama.

The European Central Bank’s Dec. 8 decision to open new credit lines for hard-pressed banks has fuelled optimism. The move also eases banks’ balance sheet strains and helps build loops of positive market feedback. Though other factors are undoubtedly at play, yields on many sovereign bonds – and not just the safest ones – are ticking down. With a second round of the ECB’s Long Term Refinancing Operation (LTRO) in the offing, euro sovereigns are likely to derive continued support.

The ECB liquidity may be helping to sustain share prices too. Meanwhile, the fall in the value of the euro may be prompting equity investors to be more positive. Until the crisis of 2008, the euro and euro equities usually moved in opposite directions. Since 2008, euro shares and the euro currency have usually moved up and down together. Since Dec. 8, the Stoxx 600 index of euro equities has climbed about 7 percent while the euro has dropped against the dollar by a similar amount.

But although customers of euro zone exporters will find goods and services cheaper, it is easy to exaggerate the impact of such currency moves. Only about 16 percent of euro zone GDP is exported outside the area. Besides, the economic proof that devaluation encourages export trade is far from conclusive. And on a trade-weighted basis the euro is only back at its lifetime average. The volume of cash in the second tranche of LTRO, meanwhile, could disappoint if it falls way short of the near-500 billion euros of the first one. If the numbers are a lot smaller, sentiment could switch back.

Pan-market optimism may be merited, especially with regard to equities which in Europe trade on a forward p/e multiple of 10, compared to a 20-year average of 15. But if European economies stagnate or are hit by recession, the optimism could rebound on investors. Gold, that traditional harbinger of doom, fell quite heavily before Christmas. But it has chased upwards again since New Year. That is hardly a good sign.

By Robert Cole

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Planet finance has a propensity to turn itself upside down and inside out. It’s up to its old tricks again. A new collection of commentaries from Breakingviews sets the financial agenda for the next 12 months.

Click here for the e-book

In 2012, the euro poses question number one. Those looking on the dark side think the single currency will divide into a collection of national or multi-national coinages. If the euro does break up, the toll on jobs, economic activity, freedom of movement, and social cohesion would be huge. And that’s why it probably won’t fail.

Bright-siders at Breakingviews prefer to put a number on the odds of survival rather than extinction of the euro. Let’s say there’s a nine out of 10 chance that European monetary union will weather the storms of 2012 and beyond. Then the big question becomes, “How much will it cost, and how long will it take, to nurse the euro back to full health”.

Stateside, meanwhile, it is election year, and Barack Obama has a fight on his hands to stay in the White House. Financial markets will be on alert for swings in the presidential race and in the make-up of the new U.S. Congress. It is not just about the winners, but also about how successfully the world’s largest economy will deal with its budget gap and political gridlock.

By Robert Cole The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

It is the oldest saw in the investment handbook: buy low and sell high. But with global shares at their cheapest in a generation, confident equity investors are a rare breed.

Back in 1999, share buyers were everywhere, clambering over themselves for any old variety of equity – and plenty of the new-fangled dot-coms too. Even a sober investor, one that bought a diversified basket of S&P 500 equities, would have got in at a price in excess of 20 times forward earnings. Now the forward PE ratio is just above 11.

Those that bought in the high old times around the turn of the century have not lost as much as might be imagined. Increases in corporate earnings have cushioned the pain caused by the compression of valuation multiples. And dividend payments have bolstered total returns. The all-in value of a portfolio of $1,000 worth of S&P 500 shares acquired at the turn of the century is now just in the black – in nominal terms – despite the intervening crisis.

A new Breakingviews calculator works out what happens if, over the coming years, valuation multiples rise again. Say an investor buys in at 11 times earnings and sells in five years’ time at the 25-year average S&P 500 PE ratio of 15 times. Meanwhile, suppose companies manage to increase their earnings per share at a 5 percent annual rate. Bears might think that is optimistic – and short term it may be. But the longer term earnings trends suggest this is a modest assumption.    Each $1,000 invested now would be worth more than $1,740 in five years. Dividends, currently running at a 2.6 percent yield on the S&P 500, will add an extra fillip. But inflation will reduce the real gain. Assuming 2.5 percent is a reasonable outlook for inflation, that’s roughly a wash with dividends.

Stocks are of course risky. History may not repeat itself. Global banks could fail, currencies could spiral, poverty could descend on the world’s consumers and markets could suffer a long financial winter. But savers confident enough to believe that better times will roll again within a few years should hope the gloom lasts a bit longer yet. It’s a great time to buy equities.

Predictions: Breakingviews is publishing a series of articles over the holiday that look ahead to 2012. The pieces will be collected together in the annual ’Predictions Book’, produced in print and electronic form early in the New Year.

By Robert Cole The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Just as a picture is better than a thousand words, an apt zoological metaphor conveys financial insight more effectively than the most comprehensive spreadsheet. But conjure the wrong creature out of the hat and confusion multiplies more quickly than a wrack of rabbits.

Financial zoology has evolved fast in recent years, way beyond the traditionally optimistic bulls and pessimistic bears. Bubble-blowing stags were seen padding around under-priced share issues. We were then told that if you paid peanuts to corporate executives, you’d get monkeys; and not expect too much of institutional investors, for they were no better than sheep.

We became familiar with several breeds of turkey stupid enough to vote for Christmas; with chickens that sometimes came home to roost and sometimes played daringly risky games with one another; with cats that got among pigeons, or bounced when dead; dogs that failed to bark; and camels that found it easier than bankers to get through the eyes of needles.

So far, so illustrative. But it is a jungle out there, and mistaken or mixed animal metaphors have a nasty habit of returning to bite the careless analyst, scribe or policymaker. Clueless simians abounded in executive suites despite the better grub. The gnomes of Zurich, speculating against poor defenceless currencies, stretched the imagination. And euro pioneers put a Snake in a Tunnel. As with many previous and subsequent exchange rate mechanisms, that analogy proved to be more a beast of burden than a bird of paradise.

For the careless, an unseen elephant in a room in old Europe does the same job as an 800 pound gorilla hunkered down in the United States. But the attentive financial zoologist should know that an elephant unseen is friendlier, and more predictable, than our heavy homininaean cousin. Both are less dangerous than either a lazy donkey or one of the feckless PIIGS.

When explaining complex financial transactions with zoology it is essential to pick the right horses for the right courses. There is only so much bull that an audience can bear. It is the fittest animal metaphors that survive.

By Robert Cole The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Heathrow is a jam-packed embarrassment for those who promote London as a global financial centre. A brand new four-runway hub in the Thames estuary east of the UK capital might relieve the squeeze. The idea is favoured by Boris Johnson, the mayor of London. Central government enthusiasm would be greater if all the funding could be raised from the private sector – although the UK government now says it will explore plans to maintain the UK’s aviation hub status.

Second-rate air infrastructure causes economic damage, while the direct and indirect gains of having a first class air hub are substantial. But these things are hard to quantify. Private financiers – wanting a reasonable return on their investments – could only count on receiving part of the extra revenue generated.

Investors in a purely private new airport would have to rely on fees paid by passengers. If the airport took all the additional traffic that some expect could come to London, the cashflow, according to a Breakingviews analysis, would be about 2.1 billion pounds a year – in today’s money.

Work commissioned by the Mayor of London suggests that passenger numbers could climb from the current 140 million to 400 million by 2050. Meanwhile latest numbers from Ferrovial, the owner of Heathrow, suggest a net profit of about 8 pounds per passenger. Discounted in perpetuity at 7 percent, the rough cost of capital used in the current regulatory regime, private financiers might count on about 30 billion pounds of present value from the expected increase in traffic.

That is a rough estimate. The choice of the discount rate makes a big difference. But it is well below the rough estimates of the cost of the airport and the related transport and environmental infrastructure. Foster+Partners, the architectural firm, and Halcrow, the construction consultancy, has put a 50 billion pounds price tag on their plans. And those companies’ estimates may err on the low side.

An enlightened government – with fewer deficit worries – might be willing to make up the difference. For one thing, there would be political gains in making Heathrow less crowded. But without state help, a brand new London airport will struggle to get airborne.

By Robert Cole The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Investors may be rethinking the inherent riskiness of equities, especially compared to bonds. It’s a logical response to seismic shifts in the euro sovereign debt markets.

Normally, shares would be expected to suffer alongside bonds at these troubled times. After all, equities come at the bottom of the creditors’ pecking order, making them among the riskiest of financial assets. Investors might be expected to flee from stocks since bond market woes reflect, at least in part, fears of recession.

But leading equity indexes such as the Stoxx 600 and MSCI World have suffered only modest falls recently. US shares show gains over in the short and medium term. And the latest Bank of America Merrill Lynch survey of fund managers suggests that equity market sentiment is improving, especially in the United States.

Several factors sustain hope for shares. On one side, the crisis has cut into the appeal of bonds. Euro zone sovereign risk, once thought vanishingly small, has grown. Even if there are no defaults (other than Greece), the possibility makes all bonds look relatively more risky, and shares relatively less so.

Meanwhile, companies on average have strong enough balance sheets to stand aside from what is essentially a debt crisis. Aside from financial stocks – which investors would do well to treat separately just now anyway – companies tend not have exposure to government bonds.

True, the weakening economic outlook means that corporate earnings growth may slow. But Thomson Reuters’ Starmine database suggests that year-on-year earnings, globally, will rise 11.8 percent over the next 12 months. Commercial life in Europe may be tougher, but if continuing euro zone woes prompt concerted intervention from, say, the European Central Bank, euro shares could draw benefit alongside bonds.