It is becoming increasingly clear that the international community fully recognizes the need to ensure that the global economy does not become engulfed by another financial crisis at this critical juncture. Developments with regard to the referendum question in Greece and the fate of MF Global (MF) make this issue particularly pressing. There is therefore significant rationale for some kind of coordinated G20 action out of the coming Cannes Summit on November 3-4th.
In an article in early October, I argued that it was clearly in the interests of countries like China to aid the work-out process in Europe:
'....At that point, any discussion of negotiations on a potential deal on European debt at the G20 summit could help the market higher. There is certainly room for such a development and my read of the political tea leaves is that it may well involve a significant commitment from China. If that looks likely to be the case, it should again help the market towards a recovery...'
You can read the original article here and a more detailed assessment of the rational and likely path forward here and here. That general assessment looks generally to have been proven to be correct, with China’s willingness to support the EFSF mechanism in some manner now more or less clear (though any significantly negative political developments in Greece could obviously put that support on hold).
Interestingly, another reading of the political tea leaves suggests that the G20 may well decide to announce a further coordinated program – to convince the markets that they can act to sustain global growth. This could involve:
- An overall stimulus commitment from a number of member countries - and particularly those currently running current account surpluses
- In particular, a deal on investment in clean energy (expect a lot from Germany, China and Japan on this)
How to judge the market’s reaction is difficult in the midst of its confused reaction to both the MF Global and Greek referendum issues. However, three points seem reasonable:
- If the price action continues to be negative on the S&P and the Euro going into the G20, an announcement of something like this (or initial talk about it) could produce a decent dead cat bounce of significant proportions at least. Both the SPY and FXE ETFS could bounce sharply. We should also be getting further confirmation of the commitment of China and other BRICs to the EFSF story.
- In clean energy, wind and solar and the like would get a decent leg up. Solar has been destroyed in the last few months and a basket of solar players could do very well on an announcement such as that discussed above. First Solar (FSLR), SunPower (SPWRA), Suntech Power (STP) and Yingli Green Energy (YGE) for example together look interesting as an announcement play at current prices. Alternatively, purchasing a solar ETF such as TAN also makes sense. In wind, exposure to market bellwether Vestas (VWDRFY.PK) or simply FAN, the best wind ETF probably makes most sense.
- In terms of electric vehicles, the most interesting play remains Tesla (TSLA). For a broader discussion see here.
The bottom line is that the G20 member countries know that the global economy and markets are at a critical juncture. They are therefore likely to pull out all the stops in order to convince the markets that they can prevent a financial crisis of global proportions. And some stimulus from a push on clean energy is entirely possible.
Disclosure: I am long SPY.
Additional disclosure: I intend to put on a basket of clean energy stocks, as discussed above, over the course of the next 24 hours.