Investment Themes - Global Middle Class

Search all article by their themes/tags in the search area
below for example “Energy” or “Technology”.

Search Results

Found 540 results in Global Middle Class
November 30 2015

Commentary by Eoin Treacy

A Slow Slog Back

Thanks to a subscriber for this report from Morgan Stanley looking at the outlook for the global economy next year. Here is a section on emerging markets:

(2) Commodity exporters (top three EM in this group are Brazil, Russia and Indonesia): While USD appreciation was already resulting in an exogenous monetary tightening in these countries, a simultaneous downward trend in commodity prices and weakness in non-commodity exports hit these economies hard. Domestic demand in these economies has been impacted adversely since 2Q15, as reflected in the trend for real imports.

(3) Commodity importers (top three EM in this group are India, Korea and Turkey): Commodity importers in EM have also seen a slowdown in exports but their domestic demand has seen a positive offset in the form of the terms of trade, which has also helped to improve their current account balance. Lower inflation has encouraged the central banks to ease monetary policy even as the dollar has been rising.

Advanced Stage of Adjustment, EM Drag to Decline
While we think the EM adjustment is not yet complete, we expect the EM drag on global growth to reduce as all three factors – terms of trade, real rates needed in response to the rise of the dollar and unwinding of domestic misallocation – will become less onerous. Particularly on the issue of real interest rates, the top ten EM excluding China have now lifted their real interest rates about 270bp higher than US real rates. With real rates remaining high as EM continues on the adjustment path, a number of them, though not all, are likely to see improvement in macro stability indicators including their current account balances and inflation. Indeed, we expect more EM central banks to cut policy rates, though still on a selective basis, in 2016.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

2015 has already seen some major declines in emerging market currencies with a number of Asian currencies testing their Asian Financial Crisis lows while commodity related currencies are also testing historic lows. A crisis needs to be seen to be getting worse for it to continue to have such a marked effect on prices. Rather than focus on the extent of the problem, the better question at this stage is to ask how much worse is it likely to get? 



This section continues in the Subscriber's Area. Back to top
November 30 2015

Commentary by Eoin Treacy

Volkswagen Closes In on Fixes for Dirty Diesel Motors in Europe

This article by Birgit Jennen and Christoph Rauwald for Bloomberg may be of interest to subscribers. Here is a section:

The most important next step will be as and when VW will conclude its internal investigations,” Arndt Ellinghorst, a London-based analyst for Evercore ISI, wrote in a note Monday. A program the company set up to encourage whistle-blowers expires Monday, and VW plans to present interim results of its internal inquiry in mid-December.

The carmaker is facing an emissions scandal on three fronts: cheating software it installed in about 11 million cars worldwide; irregular carbon dioxide ratings on about 800,000 vehicles in Europe; and additional questionable emissions software in about 85,000 VW, Audi and Porsche cars with 3.0-liter diesel engines in the U.S. Approval of repairs in Germany, and by extension the rest of Europe, doesn’t guarantee a thumbs-up in the U.S., where regulators first uncovered Volkswagen’s diesel deception.

For the smaller diesels, the German manufacturer has submitted a plan to repair nearly half a million cars to U.S. regulators. A response is due in December. For the bigger diesels, the company plans to alter the questionable software, known as an auxiliary emissions control device, and resubmit it for approval.

 

Eoin Treacy's view -

Volkswagen has sustained a great deal of damage to its reputation as a result of its subterfuge in marketing “clean diesel”. The big question is how they can contain the cost of fixing it and if that can be achieved with introducing an additional filter which does not impact performance that would be very good news. 



This section continues in the Subscriber's Area. Back to top
November 20 2015

Commentary by Eoin Treacy

Goldman Says the Years of Emerging-Markets Doldrums Are Over

This article by Ye Xie for Bloomberg may be of interest to subscribers. Here is a section: 

Goldman Sachs predicted that developing countries will grow 4.9 percent next year, from an estimated 4.4 percent in 2015, marking the first acceleration since 2010. While it is still below the long-term trend, the improvement can only help boost investor confidence given the current “widespread bearishness,” the analysts wrote.

“We would part ways with the extreme pessimism that we sometimes encounter about the long-term prospects for EM assets,” they said.

The MSCI Emerging Markets Index rose 0.5 percent at 10:31 a.m. in London, extending its weekly advance to 2.5 percent. A gauge of 20 developing-nation currencies gained 0.8 percent in the past five days, paring this year’s slide to 12 percent.

Goldman Sachs said the biggest risk is a “significant depreciation” of the yuan. A stronger dollar and slower growth in China may prompt policy makers to allow the currency to fall with a spillover effect rippling through emerging markets, the report said.

“In our view, the fallout from such a shift is the primary risk,” the analysts said.

 

Eoin Treacy's view -

Falling commodity prices and competitive devaluation have played havoc with Eastern European, Latin American and Asian currencies. At the Singapore venue for the Chart Seminar earlier this year the majority of the currency discussion focused on the need to hedge exposure to the Euro while delegates considered the risk represented by the Chinese Yuan too much trouble since the market has been inert for so long. There is career risk in being too early particularly if another market is offering greater short-term opportunities, but is also worth remembering that we define a range as “an explosion waiting to happen”. When the status quo shifts there can be meaningful changes in trend. I suspect this will be a topic of conversation at next week’s London venue for The Chart Seminar now in its 46th year. 



This section continues in the Subscriber's Area. Back to top
November 12 2015

Commentary by Eoin Treacy

Which currencies have made new lows?

Eoin Treacy's view -

The Dollar has been firm, that’s not news, but it experienced a sharp pullback against most currencies following the market low in risk assets from early September. This rebound has not influenced every currency equally and while most have held their gains, a number posted new lows.  These are the Philippine Peso, South African Rand, Norwegian Krone, Peruvian Sol and the Canadian Dollar is testing its low. 



This section continues in the Subscriber's Area. Back to top
October 26 2015

Commentary by Eoin Treacy

Africa: The next frontier

Thanks to a subscriber for this report from Deutsche Bank focusing on Africa’s potential as a commodity exporter and consumer. Here is a section focusing on copper:

The world will need an estimated 5mt of additional mined copper by 2025

Copper demand has grown 3.2% each year since the end of WWII. However, we estimate that this growth rate will drop over the next 15 years to be below trend at 3%. This takes into account our GDP expectations, ongoing industrialisation of the emerging market economies and further substitution.

Despite the strong growth in copper demand in China over the past decade (2000-2010, near 15% CAGR), global copper demand was a more muted 2.4% The high price environment of 2005-2008 led to demand destruction of around 2.2mtpa, with widespread substitution.

Taking into account increased secondary supply (+3% pa), mine depletion from falling grades (see Figure 29) and supply additions already underway, we estimate the world will need an additional 5Mtpa of mined copper by 2025, or around 500kt each year. This is more than a Collahuasi-sized mine each year (445kt in 2014) or two Andina-sized mines (232kt in 2014).

Time to first production is now at least 12 years
As shown here, for a typical Greenfield copper mine, the time to first production is at least 12 years. For diamond mines, the time frame has extended to an average of 22 years. For gold mines, the average time frame for the mines currently producing in Cote d’Ivoire was 15 years to get to first production (see Figure 32).

And 

Most major known deposits are currently exploited across Chile, Australia, North American, Russia and China. As shown earlier (in Figure 1 on page 4), Africa has a wealth of mineral resources, hosting 95% of the world’s known platinum, 65% of its manganese, 50% of its diamonds and cobalt, 40% of its gold, 30% of the world’s bauxite, and approximately 10% of the world’s known copper sits in the Central African Copperbelt. Yet today, Africa supplies only 11% and 12% of the world’s copper and gold respectively, plus just 9% of its thermal coal.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

This report carries a very interesting graphic illustrating the number of conflicts that occurred in the 1990s compared with the last decade. Relative peace has broken out across the continent despite some high profile trouble spots grabbing attention. The question then is to what extent higher commodity prices contributed to this easing of tensions? 

In an environment characterised by a dearth of capital, the potential for armed conflict increases as access to basic resources such as food, energy and shelter is inhibited. The commodity bull market meant revenues increased and reduced the incentive for conflict. The question now is how many of the gains achieved in the last decade can be held onto and improved upon. Standards of governance are integral to this question because without improvement the potential for a number of major African countries to miss out on development over the next decade increases. 

 



This section continues in the Subscriber's Area. Back to top
October 21 2015

Commentary by Eoin Treacy

Email of the day on General Electric

The 10 year weekly chart of General Electric suggests an important break out from a long term range and a move towards the old highs.

Eoin Treacy's view -

General Electric floated the idea of dispensing with its finance arm more than a year ago but confirmed the decision in April with the aim of getting back to its industrial roots. We are now seeing the fruits of that decision. GE represents a dominant player in a number of finance businesses not least aircraft leasing and had become among the world’s largest banks ahead of the financial crisis. It had fallen into a practice where it was making more money from financing the sale of its products than it was from selling them and this left the company exposed to a credit shock which saw the share fall 75% in 2008. 



This section continues in the Subscriber's Area. Back to top
October 21 2015

Commentary by Eoin Treacy

Brazil Impeachment Papers About to Drop as Crisis Hits New Stage

This article by David Biller for Bloomberg may be of interest to subscribers. Here is a section: 

For the second time in Brazil’s 30-year-old democracy, the country finds itself lurching toward the impeachment of its president.

A group of high-profile lawyers plans to file a request Wednesday to begin the proceedings, nudging President Dilma Rousseff closer to being ousted after months of will-she or won’t-she-be-impeached speculation that has paralyzed Congress, rattled financial markets and deepened an economic slump.

If lower house President Eduardo Cunha, a Rousseff rival, accepts the request, it will trigger a months-long process and exacerbate the drama of corruption and political infighting that has highlighted Brazil’s fall from emerging-market darling.

Weakened by a bribery scandal that started at the state-run oil giant and has helped push her approval ratings to record lows, Rousseff is accused of doctoring the government’s 2014 and 2015 fiscal accounts. While the outcome of the impeachment effort is far from clear, economists and investors agree: The political stalemate needs to be resolved -- and quickly.

Without stability in the capital, they say, Latin America’s biggest country will struggle to shore up its soaring budget deficit, win back investors and rebound from what’s projected to be the longest recession since the Great Depression.

 

Eoin Treacy's view -

Ahead of the 2014 election I was hopeful Dilma Rousseff would be defeated and believed that her ouster would be a positive catalyst. Unfortunately she won and the market didn’t like it. The subsequent decline in oil prices has exposed additional problems with Petrobras and examination of those issues has revealed just how much corruption there is and how inextricably linked the President is to it. Eduardo Cunha ran against Rousseff in last year’s election so he will need to tread delicately in possibly sanctioning an impeachment lest he be seen as simply taking revenge. 



This section continues in the Subscriber's Area. Back to top
October 20 2015

Commentary by Eoin Treacy

Yum! Brands to Split China Division Into Separate Company

This article by Kevin Orland may be of interest to subscribers. Here it is in full:

Yum! Brands Inc., whose restaurants have been selling crispy chicken in Beijing since 1987, plans to split its China business off into a separate publicly traded company following pressure from activist investor Keith Meister.

The new company will be led by Micky Pant, who was named the China unit’s chief executive officer in August, the Louisville, Kentucky-based company said Tuesday in a statement. Greg Creed will continue to lead Yum.

Yum is hiving off the China business after a prolonged sales slump caused by food-safety scandals and increasing competition from local fast-food chains. Meister, a protege of billionaire Carl Icahn, has said the company’s Asian market could be better served with a more focused business and that the move could boost Yum’s value by $7 billion. The company said Tuesday that it is committed to returning "substantial capital" to shareholders in connection with the split.

Yum shares rose 4.2 percent to $74.75 at 7:09 a.m. in early trading in New York. The stock had slid 1.6 percent this year through Monday.

Eoin Treacy's view -

Splitting up the company is a big decision which was probably precipitated by the large profit miss earlier this month. KFC has been enormously successful in China but the question now is whether it has reached capacity. It is certainly ubiquitous in the larger cities so the company’s Chinese growth will depend on incomes rising, for what is a premium product, in tertiary cities particularly in the west. 



This section continues in the Subscriber's Area. Back to top
October 20 2015

Commentary by Eoin Treacy

Email of the day on the nominal price of the DAX

Can you access the DAXK on Bloomberg? It’s the DAX without dividends reinvested. Then we can compare apples with apples as it were!

Eoin Treacy's view -

Thank you for this suggestion. The DAX is a total return Index so its 2.92% yield helps to flatter total return over the medium-term and makes shorting the Index a rather expensive proposition relative to nominal indices. I’ve added the DAXK to the Chart Library and you will observe that it has a similar chart pattern but I agree it makes sense to compare nominal indices with nominal indices in one’s analysis. 



This section continues in the Subscriber's Area. Back to top
October 20 2015

Commentary by Eoin Treacy

NSA, Apple Chiefs Decode Encryption Views

This discussion highlighted by the Wall Street Journal may be of interest to subscribers. In particular, the second comment by Nathan LaFrance is in my view a good representation of how many consumers feel about the issue. Here is a section: 

Mr. Cook, appearing later, disagreed on the latter point. “I don’t know a way to protect people without encrypting,” he said. “You can’t have a backdoor that’s only for the good guys.”

Apple and federal officials have been at odds for more than a year, since Apple issued a new version of its mobile-operating system that it said safeguards user information, even from law enforcement. But the White House signaled recently that it won’t seek new laws to force tech companies to make products that allow law enforcement to eavesdrop.

 

Eoin Treacy's view -

The USA is finally introducing chip and PIN technology and not before time. My credit card details have been compromised at least four times in the last two years. I’ve now got identity protection from ULCA Health, Anthem, Target, Home Depot but the letter I received yesterday was the one I was most surprised about. Experian, the firm other companies use to check the credit of a customer has been hacked with the loss of untold quantities of client data. In many respects I hope its Chinese government backed hackers since they have little interest in me specifically but after so many incidents one simply has to assume that our most personal data is out there in the public domain. 



This section continues in the Subscriber's Area. Back to top
October 15 2015

Commentary by Eoin Treacy

Drivers Ride High on Trucking Boom

This article by Robbie Whelan and Brian Baskin for the Wall Street Journal may be of interest to subscribers. Here is a section: 

“Everyone is fighting over the same drivers,” said Dan Pallme, director of the Intermodal Freight Transportation Institute at the University of Memphis. “Eventually, what has to happen is salary has to rise, and the only way motor carriers can do that is by increasing the costs to their customers.”

The long-haul trucking industry, which employs about 800,000 people today, needs an additional 48,000 drivers, according to the American Trucking Associations, a trade group. That is a tall order at a time when unemployment is falling. Many who might have considered trucking are opting for construction work, a job that doesn’t involve long stretches away from home and pays competitive wages.

 

Eoin Treacy's view -

There is little commonality in the performance of trucking shares as they grapple with attracting more workers while also being required to carry lower cost items and facing competition from railroads. It’s still a number of years away but haulage is a prime target for autonomous vehicle manufacturers and the incentive to come up with a workable solution is all the more compelling with wage hikes such as those detailed in the above article. 



This section continues in the Subscriber's Area. Back to top
October 12 2015

Commentary by Eoin Treacy

Myanmar's Quest to (Em)Power its Citizens

Thanks to the authors for this article penned for Foreign Affairs magazine which may be of interest. Here is a section: 

Myanmar has ambitious growth plans [12]. Officials in Naypyidaw have forecast a national growth rate of 9.3 percent for the 2015–16 fiscal year through a combination of job creation and activity in tourism, telecommunications, agriculture, and other sectors. Inadequate power proves particularly troublesome for the manufacturing sector. In Mandalay, one foundry prices its production of pumps differently depending on whether they are produced during rainy season, when hydroelectric and grid power is available at lower prices, or during the dry season, when the company must supplement supply through diesel-powered backup generators. Making matters worse, the nation’s use of subsidized tariffs means that the government provides power to citizens at a loss. Several years ago, it was estimated these subsidies created an annual deficit of over $275 million. Under past regimes [13], when economic development and domestic energy use were less of a priority, revenue gained from oil, gas, and other resource exports was used to finance the country’s survival in the face of a harsh sanctions regime. These programs largely benefited a small group of elites and select institutions and are now unpopular, even though the capital and expertise that is derived could potentially fund power sector development.

According to the World Bank, universal electrification should be both “achievable and affordable” in Myanmar by the year 2030 [14]. To this end, the organization has committed $1 billion in financial support [15] to expand electricity generation, transmission, and distribution for the national grid as well as off-grid development. The funds will be utilized to support a National Electrification Plan [16], which the government has developed in cooperation with the World Bank over the past few years. An initial $400 million loan was recently approved by Myanmar’s National Assembly as well as by the World Bank Board of Directors. Coordination meetings between donors, interested private firms, and other parties are now under way, with an anticipated program launch for the first phase before the end of the year.

Eoin Treacy's view -

South East Asia has a wonderful record of previously underdeveloped countries emerging as vibrant manufacturing and consumer economies. With that kind of record there was considerable enthusiasm expressed at the potential for Myanmar to following in the footsteps of many of its neighbours as the political climate evolves. Despite the fact this frontier market has vast upside potential it still suffers from the issue that the number of investment vehicles one might choose from is very limited. 



This section continues in the Subscriber's Area. Back to top
October 09 2015

Commentary by Eoin Treacy

Indian Drugmakers Engineer Hep C Cocktails Impossible in West

This article by Ketaki Gokhale  Caroline Chen for Bloomberg may be of interest to subscribers. Here is a section: 

Patent applications in India for Sovaldi, also known as sofosbuvir, and Daklinza, also known as daclatasvir, are being challenged by groups of patients, lawyers and scientists. Decisions on whether Indian patents will be awarded to the two U.S. companies are pending. If they don’t win patents, it would pave the way for Indian generics and combination pills.

India’s patent office has rejected patents for drugs including Novartis AG’s cancer treatment Gleevec and Roche Holding AG’s HIV treatment Valcyte. In 2012, an Indian patent appeals board revoked patent protection for Roche’s hepatitis C injection Pegasys. The patent office didn’t answer calls seeking comment.

Generic Licenses
If the patent challenges on the Gilead and Bristol-Myers drugs fail, Indian companies would need to win licenses to copy the patented drugs and combine them. Bristol-Myers is in advanced discussions with Indian drugmakers for licenses to make and sell generic daclatasvir in 90 countries, spokesman Rob Perry said via e-mail. The intended agreements would allow the development of combination medicines if the licensee has rights to other drugs, Perry wrote.

Gilead last year licensed 11 generic drugmakers including Hetero Labs Ltd., Cipla and Aurobindo Pharma Ltd. to make and sell generic sofosbuvir in 101 developing countries. Those agreements also allow the development of combination medicines with other companies’ drugs, Cara Miller, a Gilead spokeswoman, wrote by e-mail. Spokespeople for Cipla, Hetero and Aurobindo didn’t respond to e-mails seeking comment.

 

Eoin Treacy's view -

Indian drug makers enjoy a charmed existence within a loose regulatory framework, large domestic population and international exposure to a host of countries with similar values and an inability to pay the same prices as North American and European customers. This has allowed a number of companies to develop significant positions within the global generic pharmaceuticals sector. 



This section continues in the Subscriber's Area. Back to top
October 07 2015

Commentary by Eoin Treacy

MSCI Emerging Markets

Eoin Treacy's view -

Veteran subscribers will be familiar with our distaste for the acronym “emerging markets” because it is a very big world out there and it rarely pays to group them all together. Nevertheless, there is no denying that many investors do group them all together and the performance of indices like the MSCI Emerging Markets has an impact on sentiment.

The constituents of the Index have evolved quite considerably over the last few years, moving from a heavy focus on Brazil, Russia and China to China (18%), South Korea (15.24%), Taiwan (12.3%), India (8.75%), South Africa (7.91%) and Brazil (6.39%) at present.

The Index broke down from a lengthy medium-term range in July and has stabilised in the region of 800 over the last month. Potential for a reversionary rally is now looking more likely than not. 



This section continues in the Subscriber's Area. Back to top
October 07 2015

Commentary by Eoin Treacy

DuPont Breaking In Two After CEO Exit Seen Raising Value 31%

This article by Jack Kaskey for Bloomberg may be of interest to subscribers. Here is a section: 

DuPont shares surged Tuesday by the most in six years in anticipation that more value will be unlocked. The Wilmington, Delaware-based company said Kullman will be replaced later this month as both CEO and chairman on an interim basis by board member Edward Breen, who oversaw the dismantlement of Tyco International Plc.

Earlier on Monday, Trian Fund Management, the activist investor that argues DuPont would be worth more as two companies, announced it had added to its stake in the company.

In May, Trian co-founder Nelson Peltz led the firm in its proxy fight in a doomed attempt to get three board seats.

"It’s kind of bittersweet, because Trian is vindicated in some respects," said Hank Smith, who helps manage $6.5 billion as chief investment officer at Haverford Financial Services Inc.

in Radnor, Pennsylvania. "If DuPont had embraced Trian earlier on and welcomed Peltz on the board, Ellen Kullman would still be CEO."

 

Eoin Treacy's view -

Speciality chemicals is an amorphous terms used to describe businesses leveraged to everything from agriculture, energy, healthcare, home improvement and anything in between. The drawdown in commodity prices affected at least two of those segments and the difficulties experienced by Latin American countries has been an additional headwind particularly for DuPont. 

One of the original reports on the potential of unconventional gas was written by analysts at Citigroup and titled “Shale Gas: a gamechanger for the chemical sector”. The boom in unconventional oil and gas drilling was a major benefit for chemical companies supplying the “mud” that lubricated the drill bit and keeps the fractures open so oil and gas can flow. The reduction in drilling activity has been an additional headwind and contributed to the relative underperformance of chemical companies. 

 



This section continues in the Subscriber's Area. Back to top
September 29 2015

Commentary by Eoin Treacy

Luxury goods From growth to brand productivity

Thanks to a subscriber for this report for Deutsche Bank which may be of interest. Here is a section:

The track record suggests that brands that have focused on productivity already in past years – such as Hermes, LV, and Cartier – are already reporting sustainable outperformance in sales and profitability. Higher levels of productivity give room to invest in the brand equity for the long term and finally create unprecedented levels of cash flow. In this volatile environment, these qualities are even more valuable than catch-up opportunities, in our view. At the opposite side of the spectrum, brands that have lower-than-average productivity are likely to face increasing margin pressure: the risk is a short-term reaction, at the expense of the brand equity, with a potentially higher toll to be paid in the longer term.

We have therefore summarized into a unique Brand Power Index the weighted average combination of the quartile ranking across seven dimensions for each brand. Three quantitative measures have received a 20% weight each: retail productivity, brand productivity, and Return on Capital. Four more qualitative and therefore discretionary variables have received a 10% weight each: pricing discipline, exclusivity, brand momentum, and organic opportunity to improve margins. Based on the relative positioning across several variables, we have identified, as shown in Figure 5, the brands that rank in top quartiles. This provides a framework, as objective as possible, to evaluate brand productivity, margin sustainability, and opportunities to improve. An interesting fact about this index is that successful implementation of appropriate strategies can help companies improve their scores.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

Before Xi Jinping cracked down on extravagant displays of personal wealth among the Communist Party’s elite, there was high demand for just about all luxury brands and strong commonality was evident right across the sector. The more recent slowdown in the Chinese economy has exacerbated the issues facing luxury goods with the result that there are some clear winners and losers. 



This section continues in the Subscriber's Area. Back to top
September 24 2015

Commentary by Eoin Treacy

After Brazil, the Deluge? Watch These Nations for Downgrades

This article by Lyubov Pronina for Bloomberg may be of interest to subscribers. Here is a section: 

Two weeks after the Latin American country lost its investment grade at one of the three major ratings providers, CDS investors are punishing other emerging markets facing similar challenges, sending their implied ratings at least five levels below their official grades, according to data from Moody’s Corp. Malaysia is A3 at the company, though traders see it six levels lower at Ba3. South Africa, which is a Baa2, is viewed as a B1 borrower. Three Aa3 nations including China are perceived by the markets as deserving the lowest investment grade.

Most developing nations are confronting the same issues that saw Brazil losing its investment-grade rating at Standard & Poor’s -- a plunge in commodity prices, a slumping currency and political turmoil. Sputtering growth in China and the prospect of higher U.S. interest rates are also boosting concern of more downgrades across emerging markets. Having been censured for laxity during previous market meltdowns, the ratings providers won’t want to be caught failing to act this time round, Per Hammarlund of SEB AB said.

“The deterioration in commodity-dependent economies’ credit-risk metrics can lead to more downgrades in emerging markets in the next three to six months, if not earlier,” said Hammarlund, the chief emerging-markets strategist at SEB in Stockholm. “The rating agencies were roundly criticized for being slow to react during the 2008 crisis as well as the 2011 euro-zone crisis. They are going to be much more trigger happy this time.”

 

Eoin Treacy's view -

The 2037 Brazilian US Dollar denominated benchmark with a coupon of 7.125% traded at a price of 155 at its 2012 peak. It traded below par for the first time since 2009 this week as the outlook for Brazil’s capacity to repay its debts has deteriorated with commodity prices and the realisation that governance has not improved to any measurable extent. The downgrade to junk status by S&P is an important development. 



This section continues in the Subscriber's Area. Back to top
September 23 2015

Commentary by Eoin Treacy

VW Chief Winterkorn Steps Down After Emissions Scandal

This article by Chad Thomas for Bloomberg may be of interest to subscribers. Here is a section: 

The new CEO’s top priority will be getting to the bottom of a scheme intended to dupe regulators and consumers about emissions of diesel engines installed in 11 million cars worldwide -- more vehicles than VW sells in a year. The automaker set aside 6.5 billion euros ($7.3 billion) on Tuesday to cover potential costs.

VW’s Achilles heel remains the American market. Even before the revelations of the last week, the VW marque was struggling in the U.S., despite investing $1 billion on a new factory in Tennessee to build a stripped-down, cheaper version of the Passat sedan. The brand’s U.S. sales have dropped, in contrast to growth in the overall market, as VW delayed decisions on building sport utility vehicles that would appeal to American consumers. The automaker is also grappling with a slowdown in China, the company’s biggest national market.

Working in the new CEO’s favor is an automaker that for the moment is financially sound. Volkswagen’s automotive division had net liquidity of 21.5 billion euros at the end of June, and posted record profit of 12.7 billion euros in 2014, helped by its strong presence in China and the expansion of the Audi and Porsche nameplates in the lucrative luxury-car segment. VW surpassed Toyota Motor Corp. in the first half to take the top spot in worldwide vehicle sales -- a goal that Winterkorn set early in his tenure to reach in 2018.

 

Eoin Treacy's view -

Unfortunately this is not corporate Germany’s first corruption scandal. Over the last decade there have been a number not least at Siemens, Commerzbank, Deutsche Bank, Man AG, and Infineon among others. Often these have centred on faking expenses and bribery but this may be the first exhibiting outright fraud. These articles from NBS News in 2005, the New York Times in 2008 and the Economist in 2009 may be of interest for historical perspective. Despite these lapses in the standards of governance at large corporations the German stock market has been among the strongest in the region. 

The DAX has paused in the region of the August low but a sustained move below that level would be required to question scope for some additional steadying in this area which would at least allow the oversold condition relative to the trend mean to be unwound. 

As this article points out cheating on emissions isn’t exactly new either. 

 



This section continues in the Subscriber's Area. Back to top
September 23 2015

Commentary by Eoin Treacy

Rupiah Drops Most in Six Weeks After Indonesia Cuts GDP Estimate

This article by Yudith Ho for Bloomberg may be of interest to subscribers. Here is a section: 

The Indonesian parliament’s finance commission agreed late on Tuesday to lower the expansion projection in the 2016 budget to 5.3 percent from 5.5 percent. A preliminary factory gauge released Wednesday in China, Indonesia’s largest trading partner, missed estimates and dropped to the lowest since 2009.

Investors are still waiting to see when the Federal Reserve will raise interest rates, a move that’s expected to sap demand for emerging-market assets.

The rupiah declined 1 percent, the most since Aug. 12, to close at 14,647 a dollar, prices from local banks show. It fell to 14,661 earlier, the weakest level since July 1998, and is down 15 percent this year in Asia’s worst performance after Malaysia’s ringgit.

“The rupiah continues to decline as markets pare their expectations,” said David Sumual, chief economist at PT Bank Central Asia, the nation’s largest lender by market capitalization. “This growth estimate is more realistic. At this stage, with the Fed still clouding the outlook and China continuing to slow, it’s better to be conservative than see another revenue shortfall.” 

 

Eoin Treacy's view -

Indonesia has CPI of more than 7.5% and overnight rates of 5.75%.

The Dollar’s uptrend against the Indonesian Rupiah has picked up pace over the last month and a clear downward dynamic will be required to signal mean reversion is underway. 



This section continues in the Subscriber's Area. Back to top
September 18 2015

Commentary by Eoin Treacy

Premiumization is the ultimate Challenge

Thanks to a subscriber for this report from Deutsche Bank which may be of interest. Here is a section: 

Amidst a macro slowdown, Chinese consumer upgrades continued in 1H15, illustrated by the sustainable outperformance of high-end beer, high-quality infant formula, natural water, new premium beverages, high-end diapers, etc. This favours foreign brands, and we view premiumization as the most challenging trend for local brands.

1H15 review: volumes down, prices up, input costs down
In 1H15, the combined revenue/NPAT of HK-listed FMCG stocks under DB coverage (ex-meat) were down 4%/up 2% yoy, largely as volumes were down, prices were up and input costs were down. In the midst of the macro slowdown we saw premiumization, continuous channel destocking and channel shifts. After the completion of destocking, the revenue/NPAT of the major A-share baijiu companies rose 5%/3% in 1H15, Nestle (NESN VX, Hold) recorded mid-single-digit growth in 2Q15, and Unilever (ULVR LN, Buy) returned to modest growth in 1H15 in China. Premium foreign infant milk formula, high-end diapers and beer continued to outperform.

2H15 outlook: de-stocking to ease, yet no signs of macro bottoming out 
After 12 months of channel destocking, we expect pressure to ease in 2H15, while the input cost inflation risk remains low. However, headwinds from the macro slowdown and channel shifts remain strong. Longer term, we think the most challenging trend for local brands is premiumization (both branding and product), as foreign brands are more experienced.

 

Eoin Treacy's view -

The wealth gap is China has created a challenge for domestic brands because the lower middle class has not yet achieved the disposable income levels required to afford many consumer goods while the upper middle class demand premium products and the security of quality that comes with foreign brands. 



This section continues in the Subscriber's Area. Back to top
September 16 2015

Commentary by Eoin Treacy

Pound in Steepest Gain in a Month as Wages Boost BOE Rate Hawks

This article by Lukanyo Mnyanda for Bloomberg may be of interest to subscribers. Here is a section: 

Total pay in the U.K. including bonuses rose an annual 2.9 percent in the three months to July, up from a revised 2.6 percent in the previous month, the Office for National Statistics said Wednesday. The median prediction of economists in a Bloomberg survey was for a 2.5 percent increase. The jobless rate fell to 5.5 percent, matching the lowest since 2008, from 5.6 percent in the second quarter, the ONS said.

Before the Fed’s decision on Thursday, investors will also get to scrutinize U.K. retail-sales data to gauge whether, like their counterparts in the U.S., British consumers looked beyond the turbulence in global markets and boosted spending.

Sterling stayed stronger as BOE Governor Mark Carney said there’s a chance that interest rates may need to increase from a record low in early in 2016 if the economy continues to grow and inflation pressures pick up. The Monetary Policy Committee will have “feel its way as it goes” when facing a decision on tightening monetary policy within the next few months.

“The prospect of sustained momentum in the U.K. economy and the gradual firming of underlying inflationary pressure will likely put the decision as to when to start the process of gradual monetary policy normalization into sharper relief around the turn of this year,” he said in testimony to lawmakers in London.

 

Eoin Treacy's view -

The UK benefitted enormously during the credit crisis by being the first to devalue its currency. This put the economy in a sound competitive position as the crisis and eventual recovery took hold. By tolerating higher than trend inflation from 2010 the Bank of England was able to chip away at the quantity of debt outstanding and continued monetary accommodation has been a benefit for companies of all sizes. 



This section continues in the Subscriber's Area. Back to top
September 16 2015

Commentary by Eoin Treacy

We are nowhere near peak coal use in India and China

This article by Frank Holmes appeared in Mineweb and may be of interest to subscribers. Here is a section

It’s possible that if China’s coal consumption dramatically declines, India will be there to fill the hole. Macquarie estimates that by 2025, India’s energy demand will rise 71 percent, with coal taking the lead among oil, gas, hydro, nuclear and others. The south Asian country is already the second-largest importer of thermal coal, and it might very well surpass China in the coming years. Macquarie writes:

Although all energy use will rise [in India], coal is the major theme as consumption and local production are both set to almost double by 2025 on the back of large-scale coal power plant construction plans.

The group adds that, unlike China, India has no present interest in reigning in its use of coal. Most emerging markets, India included, recognize that coal is an extremely affordable and reliable source of energy, necessary to drive economic growth.

Even if these predictions don’t come to fruition, the consensus is that we haven’t yet seen peak coal use in Asia. Estimates vary depending on the agency, but everyone seems to agree that demand in the medium-term will rise before it retreats. A 2014 MIT study even suggests that Chinese coal consumption could rise more than 70 percent between 2012 and 2040.

 

Eoin Treacy's view -

North America and Europe engage in a great deal of navel gazing when it comes to climate change and yet US emissions have been falling because of natural gas boom and the EU has seen aggregate emissions decline not least because of its sluggish economic recovery. The main future contributors to carbon emissions are the up and coming developing economies. If governments are truly interested in tackling the issue, doing everything possible to help China and India migrate from coal is in everyone’s interest. This is no small task because above all else coal is cheaper now than it has been in a decade. 



This section continues in the Subscriber's Area. Back to top
September 16 2015

Commentary by Eoin Treacy

AB InBev Approaches SABMiller in Record Industry Combination

This article by Paul Jarvis for Bloomberg may be of interest to subscribers. Here is a section: 

The two largest brewers have been seen as the end game for global beer mergers. An acquisition of SABMiller, led by CEO Alan Clark, would give AB InBev access to more than $7 billion of revenue in Africa with brands including Castle lager and almost $4 billion of sales in Asia, reducing AB InBev’s dependence on the Americas and Brazil.

With Latin America representing SABMiller’s biggest market, a deal would also broaden AB InBev’s presence in countries such as Colombia, Ecuador and Peru. Its Latin American brands include Cristal and Aguila.

AB InBev’s growth has been based largely around acquisitions since it was formed through a series of purchases by a group of Brazilian businessmen led by Jorge Paulo Lemann. Some analysts have speculated that Lemann’s 3G Capital could help orchestrate a takeover of SABMiller, just as it did when InBev NV bought Anheuser-Busch in 2008.

 

Eoin Treacy's view -

Capitalism trends towards concentration as the strong consume the weak. This has created a situation where groups of companies we might consider oligarchies control substantial footholds in a large number of sectors. A potential tie up between Anheuser-Busch InBev and SAB Miller would represent a further iteration of this trend. 



This section continues in the Subscriber's Area. Back to top
September 16 2015

Commentary by Eoin Treacy

As the World Gets Fatter, This Pharma Giant Gets Richer

This article by Makiko Kitamura Albertina Torsoli for Bloomberg may be of interest to subscribers. Here is a section:

After the Tresiba setback, Novo quickly began a heart safety trial demanded by the U.S. Food and Drug Administration. The company submitted a revised application in the U.S. this March -- almost a year ahead of plan. It will know around Oct. 1 whether interim trial results point toward the introduction of Tresiba in the U.S. next year.

Even without that, Soerensen insists Novo has enough products in the pipeline to sustain sales for years. The company in August said it would proceed with late-stage testing of an oral version of a GLP-1 -- until now only available as an injection. And it’s working on an oral insulin, a formidable challenge given the difficulty of regulating absorption through the gut and managing swings in blood glucose. Though even many of Novo’s top researchers doubted the idea of pills to treat diabetes, “I said: ‘Do it anyway! Try it!”’ Soerensen said. 

 

Eoin Treacy's view -

Unfortunately diabetes is a growth sector. It thrives in an environment where people eschew exercise and indulge in sugary, savoury and spicy foods. There have been some encouraging advances in treatment and awareness of the need for lifestyle change helps, but the fact that it is a chronic condition means demand for treatment remains on a growth trajectory. 



This section continues in the Subscriber's Area. Back to top
September 14 2015

Commentary by Eoin Treacy

Brazil Downgrade Leaves Firms With $270 Billion Debt Hangover

This article by Cristiane Lucchesi and Filipe Pacheco for Bloomberg may be of interest to subscribers. Here is a section: 

Brazilian companies that piled on $270 billion in international debt during the boom years are seeing their funding costs rise after the nation’s credit rating was cut to junk.
     
The spread for five-year credit-default swaps to protect against a government default, one benchmark for setting what Brazilian companies must pay for external funding, has jumped 7.5 percent to 400 basis points since the downgrade, the highest since 2009. Adding to the pain, the dollar surged to a 13-year high, making principal and interest on international borrowing more costly for local firms.

“Even very small, unknown companies issued international bonds when Brazil was considered one of the most promising economies after the 2008 financial crisis,” Salvatore Milanese, a partner at debt-restructuring adviser firm Pantalica Partners, said in an interview in Sao Paulo. “Now many of them are facing the consequences.”

Standard & Poor’s last week lowered Brazil’s sovereign credit rating one level to BB+ and said it might cut it further in response to the administration’s inability to shore up fiscal accounts as the economy falters. President Dilma Rousseff has failed to win support for her initiatives amid an investigation into corruption at the state-controlled oil company, some of which allegedly occurred while she was its chairwoman, sending her popularity to a record low and generating calls for her impeachment.

Eoin Treacy's view -

Dilma Rousseff rode to power on the coattails of President Lula’s endorsement but she was never the best candidate from a governance perspective and the currency has collapsed under her watch. An ability to ignore contradiction is characteristic of every crowd. It is not until the cohesion of the crowd deteriorates that these contradictions regain their importance for participants. 



This section continues in the Subscriber's Area. Back to top
September 11 2015

Commentary by Eoin Treacy

Musings from the Oil Patch September 8th 2015

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here is a section: 

The Bernstein report contained a chart showing LNG terminals in existence, under construction and planned globally as of late 2011. The chart actually understates the number of LNG export terminals in the United States.

One area of concentration is Australia where huge offshore gas reserves and gas from coal fields are feeding into new LNG export terminals that when all are completed will position the country as the world’s largest gas exporter, surpassing Qatar. Virtually all of this gas has been targeting Asian markets, but with the slowing economies there and now the resumption of nuclear power plants in Japan, that may be smaller than previously anticipated. A report from consultant EY shows projected global LNG demand beginning in 2012 through 2030. While the demand from Japan and Korea was projected to grow, it rose very slowly. The more dramatic growth was projected to come from other Asian countries including China. Since this forecast, China and Russia have agreed to a deal to ship Siberian natural gas into the Chinese pipeline system reducing the need for China to buy as much LNG as originally planned

Even with the projected demand growth, the EY report shows that the planned construction of LNG export terminals globally would exceed demand beginning as early as 2015 but certainly by the end of the forecast period in 2025. At that point, all the speculative liquefaction capacity as of 2011 would be surplus for meeting the world’s gas needs. 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

Natural gas is becoming an increasingly globally fungible commodity just like crude oil. With a more efficient global market it is reasonable to expect arbitrages to narrow. This is a significant consideration when long voyages are planned to the destination market not least when such a huge amount of capital has been invested in building export capacity in the USA and Australia. For the USA at least the opening up of the expanded Panama Canal early next year is good news. For Australia relatively close proximity to its destination markets is a positive.



This section continues in the Subscriber's Area. Back to top
September 02 2015

Commentary by Eoin Treacy

Brazil's Epic Era of Splurging Is Over

This article by Matthew Malinowski Dominic Carey for Bloomberg may be of interest to subscribers. Here is a section:

1. No work
Brazil’s economy bled almost 900,000 jobs over the last year. That's unheard of, even in the aftermath of the 2008 Lehman Brother’s crisis.

2. Less money
For those who still have a job, real wages contracted as much as 5 percent in May from a year ago, before easing to a 2.4 percent annual drop in July. Annual real wages, as well as moving averages for retail sales and formal job creation have all contracted this year, according to government statistics. The declines are all worse than in 2009 when the economy also shrank, as the charts illustrate.

3. No more retail therapy
As the labor market deteriorates, Brazilians have cut back the most on shopping since the start of the century. Retail sales in June dropped for the fifth straight month, the longest declining streak since 2001, data from the national statistics agency show.

Eoin Treacy's view -

During the boom in the balance of payments associated with surging commodity exports, Brazil went from being a serial defaulter to a creditor to the World Bank. However, the economic effect of the collapse in commodity prices has been exacerbated by the failure of successive administrations to improve governance. As a result the boom from massive surpluses has been wasted on corruption, vanity sports projects and inefficiency. 



This section continues in the Subscriber's Area. Back to top
September 02 2015

Commentary by Eoin Treacy

August 28 2015

Commentary by Eoin Treacy

A Currency Drop is Inflationary, Right?

This article by Jeff Black and Jennifer Ryan for Bloomberg may be of interest to subscribers. Here is a section:

The central banker's task of keeping inflation just right has become a permanent tussle with the global currency markets. Too weak a currency equals too rapid price gains. Too strong, and disinflation looms.

That's the well-worn argument under the microscope Friday at the Jackson Hole Symposium, the U.S. Federal Reserve's annual policy getaway. Gita Gopinath, a scholar at Harvard University, says that it just isn't that simple.

"The greater the fraction of a country's imports invoiced in a foreign currency, the greater its inflation sensitivity to exchange rate fluctuations at both short and long horizons,'' she says. Because the dollar is by far the dominant currency in world trade, "U.S. inflation is consequently more insulated from exchange rate shocks, while other countries are highly sensitive to it.''

Eoin Treacy's view -

The strength of the US Dollar is a much bigger headache for emerging markets that from the USA. There is both a push and pull to this argument with a weak Dollar encouraging capital to migrate and allowing borrowers to increase leverage to lower costs. The reversal of the trend sees capital flight from emerging markets and increases the risk of default among the most leveraged debtors. 



This section continues in the Subscriber's Area. Back to top
August 27 2015

Commentary by Eoin Treacy

European QE

Eoin Treacy's view -

The ECB has not stopped its QE program. In fact the volatility on stock markets only increases potential it will increase its stimulus. The ECB’s Balance sheet remains on an upward trajectory and still has more than €500 billion to go before it gets back to the stated objective of reaching 2012 peak. 
 



This section continues in the Subscriber's Area. Back to top
August 25 2015

Commentary by Eoin Treacy

Bonds Avoid the Chaos of Other Markets

This article by Lukanyo Mnyanda and Aidan Gregory for Bloomberg may be of interest to subscribers. Here is a section: 

The slowdown in China’s economy and tumbling commodities are stoking deflationary concerns, with a measure of euro-area inflation expectations for the next year signaling a potential return to deflation.

The euro-area one-year inflation swap rate, a market gauge of the outlook for consumer-price growth over that period, was at minus 0.012 percent, after falling to minus 0.057 percent, matching the lowest since February, according to data compiled by Bloomberg.

“The extent to which government yields rise is probably less than people once thought because of those lower inflation expectations,” said Nicholas Gartside, London-based chief investment officer for fixed-income at JPMorgan Asset Management. “Bonds have two classic enemies -- higher growth and higher inflation. Both of those are weaker right now.”

Eoin Treacy's view -

Yesterday’s action on global stock markets which saw an early sell-off whose ferocity took traders and investors by surprise was pegged back before the close. In a change of tack today’s bounce was completed retraced today suggesting this is still a very nervous market environment. The majority of bonds futures had rallied in early trading in response to the panicky environment in stock markets but gave up the entire advance by yesterday's close and pulled back sharply today. 



This section continues in the Subscriber's Area. Back to top
August 20 2015

Commentary by Eoin Treacy

Heightened fragility in Indonesia, Malaysia, and Thailand

Thanks to a subscriber for this report from Deutsche Bank which may be of interest. Here is a section

Just as growth is slowing, currencies are weakening, compounding the debt service difficulties of those with external currency obligations. Indeed, looking at the ratio of central bank reserves to gross external financing (defined as the sum of current account balance and debt due this year), Indonesia and Malaysia have the worst external metrics in Asia. Consider a typical commodity producer in Indonesia or Malaysia with external currency debt, facing a 50% decline in the price of exports and a 15% depreciation of the exchange rate.

Clearly the pressure on profitability would be substantial and debt sustainability risk would rise. We understand that Indonesian exporters have been nudged into increasing their hedge ratios in recent years, which may mitigate their difficulties to some degree, but if the exchange rate continues to slide into uncharted territory, systemic stress is bound to emerge.

The traditional metric of looking at an economy's reserves cover is gross international reserves in months of imports. What we do below however is apply a stricter criterion. Instead of gross reserves, we estimate usable reserves, i.e. excluding gold, SDR, IMF assets from the gross figure and netting out the central bank's forward position. Indonesia and Malaysia, using this metric, end up with around 7 months of imports. Malaysia in particular looks vulnerable to capital outflow as its reserves cover has been declining steadily. A study in contrast is India, which has improved its reserves cover considerably, rising markedly from the same level as Indonesia?" just two years ago.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

Developing ASEAN markets were among the first to bottom in 2008 and were already retesting their highs when Wall Street bottomed. They were also among the best performers in the subsequent few years but have been underperforming for two years. They had no exposure to the US housing market and had very little debt. Improving governance, an expanding middle class, relatively steady commodity prices and abundant global liquidity all contributed to their pre-eminence. So what changed?



This section continues in the Subscriber's Area. Back to top
August 19 2015

Commentary by Eoin Treacy

Germany gained 100bn euros from Greece crisis

Thanks to a subscriber for this article from AFP which may be of interest. Here is a section: 

Germany, which has taken a tough line on Greece, has profited from the country's crisis to the tune of 100 billion euros ($109 billion), according to a new study Monday.

The sum represents money Germany saved through lower interest payments on funds the government borrowed amid investor "flights to safety", the study said.

"These savings exceed the costs of the crisis -- even if Greece were to default on its entire debt," said the private, non-profit Leibniz Institute of Economic Research in its paper.

"Germany has clearly benefited from the Greek crisis."

 

Eoin Treacy's view -

No country has benefitted more from the creation of the Euro than Germany. Not only did it create a massive market centred on its currency but its competitive advantage was cemented by the Euro. Against the current background, the Deutsche Mark would be among the strongest currencies in the world rather than benefitting from the Euro being among the weakest. Its borrowing costs are now lower than even the most bullish analyst could have ever imagined before the crisis. 



This section continues in the Subscriber's Area. Back to top
August 19 2015

Commentary by Eoin Treacy

Taiwan Stocks Fall to Two-Year Low on Economic, China Concerns

This article from Bloomberg News may be of interest to subscribers. Here is a section:

The wave of declines is rooted in the problems in Taiwan's economy, Alan Tseng, vice president at Capital Investment Management Corp. in Taipei, said on Wednesday. "The electronics industry is facing the toughest competition in 10 years because of China. The index will fall below 8,000."
     
There is a "looming new bear cycle" in emerging markets, with the weaker yuan adding competitive pressures to Taiwan, Malaysia, Thailand and Vietnam because of their dependence on exports, Lim Say Boon, the Singapore-based chief investment officer at the private banking unit of DBS Group, wrote in a report dated Aug. 17. The MSCI Emerging Markets Index entered a bear market on Aug. 12.

 

Eoin Treacy's view -

China's economy is transitioning away from fixed asset investment. If it is to be weaned away from infrastructure development and housing, the value of other sectors of the economy has to increase. This explains the concerted push to develop the service and high end manufacturing sectors. In this strategy China is following the same path tread by its neighbours in their development. 



This section continues in the Subscriber's Area. Back to top
August 14 2015

Commentary by Eoin Treacy

Argentina: Scioli Emerges Victorious In Primary Election

This article from InSerbia may be of interest to subscribers. Here is a section: 

Thus, in this year’s primary election, Scioli, the Governor of Buenos Aires Province and Vice-President Under Kirchner, represented the FpV Alliance as its lone candidate while ‘United For a New Alternative’ put forth lawmaker Sergio Massa and José Manuel de la Sota, the former three-time Governor of Córdoba Province. The ‘Federal Compromise,’ meanwhile, presented Senator Adolfo Rodríguez Saá as its candidate.

On the conservative end of the spectrum in the primaries was Mauricio Macri of the right-wing Republican Proposal (PRO). Macri headed the ‘Cambiemos’ (‘We Are Changing’) coalition, an unlikely alliance between his PRO party and the Radical Civic Union (UCR), a left-leaning centrist party that traditionally remains independent or unites only with much smaller parties. The Civic Coalition ARI (CC-ARI), a social-liberal party, is also in the coalition.

PRO is led by Macri, the Mayor of the Autonomous City of Buenos Aires since 2007 after a failed bid for the same position four years prior. Meanwhile, Ernesto Sanz heads the UCR and Elisa Carrió is the head of the CC-ARI. The primary was to determine who will lead the coalition’s candidacy but it was almost guaranteed to be Macri with the other two then running on behalf of the coalition for other prominent positions.

 

Eoin Treacy's view -

Governance is Everything but it is a relative consideration. Our basic consideration is not where the level is but is it getting better? Argentina’s October election will let us know whether the disastrous administration of the Kirchner’s will be prolonged or whether a new reform-minded government will be ushered in. At present the odds are not looking favourable.



This section continues in the Subscriber's Area. Back to top
August 13 2015

Commentary by Eoin Treacy

Retail Sales Show Broad Gain as U.S. Consumers Spur Growth

This article by Shobhana Chandra for Bloomberg may be of interest to subscribers. Here is a section: 

Amazon.com Inc. held a Prime Day on July 15 to mark its 20th anniversary, featuring reduced prices on television sets, lawnmowers and other goods. The company said the promotion helped to drive orders surpassing Black Friday, an annual U.S. sales event following the Thanksgiving Day holiday that kicks off the year-end shopping season.

The job market is giving consumers the wherewithal to keep spending. Payrolls grew in July by 215,000 workers following a 231,000 gain in the prior month, and the jobless rate held at a seven-year low of 5.3 percent.

Eoin Treacy's view -

Low energy prices and cheaper imports have acted as an enabler for consumers which has helped Consumer Staples shares retain a position of relative strength. However, that does not negate the fact the retail sector remains intensively competitive particularly between bricks and mortar stores and online platforms. This has forced the former to open e-commerce sites while some youth oriented brands now maintain physical locations so potential customers can try on items but then buy them online. 



This section continues in the Subscriber's Area. Back to top
August 12 2015

Commentary by Eoin Treacy

Musings From the Oil Patch August 12th 2015

Thanks to a subscriber for this edition of Allen Brooks’ report for PPHB which may be of interest. Here is a section: 

We are not convinced that the stock market needs higher commodity and oil prices in order to continue to rise. In our view, the shift in the direction of commodity prices since 2010 reflects a transfer of the benefits of higher commodity production from producers to consumers. That means basic industries and consumers should be the beneficiaries of falling commodity prices. Long-term, commodity prices should climb in response to increased consumption, which will drive up corporate earnings that are necessary to support higher share prices. A higher stock market can come without oil prices reaching new all-time highs, but they need to be higher than current levels for energy company earnings to rebound, that is unless substantial operating costs can be removed from the energy business. The energy business may get both, and investors will benefit from increased share prices. Unfortunately, this isn’t likely until sometime in 2016.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

It strikes me as odd that anyone thinks you need a high oil price to support a bull market in equities outside the energy sector. The stock market does not need high oil prices to rally but it does need the perception that the future will be better than the past to justify progressively higher prices. Admittedly this is often associated with higher energy demand.

The concentration of revenues in the energy sector that occurred as a result of the high energy price environment is over. This has acted as an incentive for mergers. Consumers will be medium-term beneficiaries as energy savings accrue and spending power improves. But what about the short term?

 



This section continues in the Subscriber's Area. Back to top
August 11 2015

Commentary by Eoin Treacy

Email of the day on US Dollar denominated debt

Hello, that article on gold by Ambrose-Pritchard for The Daily Telegraph also refers to the $4.5 trillion in US dollars borrowed by emerging countries. With today's devaluation of the Yuan this Bloomberg article identifies the Chinese airline companies that got hammered because of the significant debt they hold in US$ terms. As the trend for rolling over US$ debt plays out in a couple of years perhaps we should trim some of our EM holdings ahead of the curve. If so, what to trim. It may be useful to know which EM sectors/companies hold significant US$ debt.

Eoin Treacy's view -

Thank you for the above article and this question which is sure to be of interest to subscribers. I would welcome some detailed research on emerging market issuers and their US Dollar exposure. Hopefully someone in the Collective has access to this information. 

At The Chart Seminar in Chicago last year a Peruvian delegate highlighted the risk of Dollar strength to the domestic market and the impact it was having on demand for consumer goods. He postulated that it was going to represent a problem for a number of Latin American issuers. This was a common sense point. 

 



This section continues in the Subscriber's Area. Back to top
August 10 2015

Commentary by Eoin Treacy

Farm machinery

Eoin Treacy's view -

Against a background where commodity related businesses have been under rather extreme pressure, farm machinery shares have exhibited relative strength. Crops have generally been favourable which has contributed to falling prices and the strength of the US Dollar has contributed to weakness. However as potential that agriculture prices have found at least a near-term low improves, the farm machinery sector may be worth studying in great detail. 



This section continues in the Subscriber's Area. Back to top
August 10 2015

Commentary by Eoin Treacy

Buffett Says a Deal for Mondelez Would Be Difficult to Envision

This article by Katherine Chiglinsky for Bloomberg may be of interest to subscribers. Here is a section:

Warren Buffett said buying Mondelez International Inc., the maker of Oreo cookies and Ritz crackers, would be difficult for him and his partners at 3G Capital because they’re still working on last month’s purchase of Kraft Foods Group Inc.

“It’s quite unlikely that Kraft Heinz will be doing a big acquisition in the next couple of years,” Buffett said Monday in an interview on CNBC. “We’ve got our work cut out for us for a couple of years.”
H.J. Heinz acquired Kraft last month with the backing of 3G Capital and Buffett’s Berkshire Hathaway Inc.

Activist investor Bill Ackman revealed last week that he has built a 7.5 percent stake in Mondelez valued at $5.6 billion. Shares of Deerfield, Illinois-based Mondelez climbed after the announcement, contributing to a 12 percent gain since July 3.

“Most of the food companies sell at prices that would be very hard for us to make a deal even if we had done all the work needed at Kraft Heinz,” Buffett said.

 

Eoin Treacy's view -

Warren Buffet and 3G Capital paid an all-time high for Heinz in 2013 which was ultimately the correct decision. Capitalism trends towards consolidation as the strong acquire the assets of the weak and become stronger. Nestle, Unilever, Colgate Palmolive, Mondelez and Kraft Heinz represent heavy weights in the global processed foods sectors which continue to benefit from the growth of the global consumer and the desire for quick snack foods as the pace of life accelerates with the demands of a modern economy. 



This section continues in the Subscriber's Area. Back to top
August 07 2015

Commentary by Eoin Treacy

Email of the day on companies that rely on Eurozone growth

RiverFront Investments have been telling us that European stocks are interesting investments now that a recovery of the EU economy is happening. Over the last few years you and David have correctly argued in favour of investment in European Autonomies because such a large proportion of their sales takes place outside Europe. If RiverFront is correct, should we not be investing in European firms that do most if not all their business inside Europe? Which European firms correspond to this criterion?

Eoin Treacy's view -

Thank you for a topical question of general interest. Europe has been through an extraordinary period of economic upheaval characterised by unprecedented fiscal austerity that has sapped enthusiasm for bullish future potential. The ECB’s decision to adopt a €1,000,000,000,000 stimulus package in order to boost availability of credit and devalue the Euro represents the same kind of bullish catalyst which the USA enjoyed for much of the last six years. This helps to explain the Euro STOXX Index’s relative strength, at least in nominal terms. 



This section continues in the Subscriber's Area. Back to top
August 07 2015

Commentary by Eoin Treacy

East Africa The next hub for apparel sourcing?

Thanks to a subscriber for this report by Achim Berg, Saskia Hedrich and Bill Russofrom for McKinsey which may be of interest to subscribers. Here is a section: 

In the past two years, a number of European companies—among them, H&M, Primark, and Tesco—began sourcing some of their garments from Ethiopia. The rest of the apparel industry took notice: since 2013, there has been rising interest in not just Ethiopia but also other East African countries as potential sourcing destinations for apparel. Also contributing to the buzz is the renewal of the African Growth and Opportunity Act (AGOA), which gives certain countries in sub-Saharan Africa duty-free access to the US market.

What is the true potential of East Africa to grow into a major garment-sourcing hub? To find out, we visited factories in the region; interviewed stakeholders, including manufacturers and buyers; and analyzed market data. In addition, we conducted our third survey of chief purchasing officers (CPOs), this time with a series of questions focused on East Africa. This year, 40 apparel CPOs, representing a combined $70 billion in 2014 purchasing volume, responded to our survey. We found that East Africa could indeed become a more important center for apparel sourcing, but only if stakeholders—buyers, governments, and manufacturers—work together to improve business conditions in the region.

Up-and-coming sourcing countries
Nearly three-quarters of survey respondents said, as they did in 2011 and 2013, that over the next five years they expect to reduce their purchases from Chinese firms. Chinese apparel production has indeed fallen since 2010—but China remains the undisputed giant of garment manufacturing, with approximately $177 billion in apparel exports in 2013.

Among CPOs surveyed, Bangladesh remains at the top of the list of future sourcing destinations, with 48 percent of respondents including the country in their top three (Exhibit 1). And 62 percent said they intend to increase their sourcing value from Bangladesh over the next five years. The next two up-and-coming countries are Vietnam and India, where, respectively, 59 percent and 54 percent of surveyed CPOs plan to increase their sourcing value in the next five years. Yet the combined apparel exports of Bangladesh ($24 billion), Vietnam ($17 billion), and India ($17 billion) still amount to less than one-third of China’s.

 

Eoin Treacy's view -

More than five years ago a Turkish delegate at The Chart Seminar who has been a cotton trader for decades told me how a number of Turkish apparel factories were moving their operations to North Africa. As Chinese wages have risen, they are also seeking to move their most labour dependent operations offshore and East Africa represents an attractive destination.  



This section continues in the Subscriber's Area. Back to top
August 06 2015

Commentary by Eoin Treacy

Michael Kors Shares Soar After Overseas Sales Fuel Profit Gain

This article by Lindsey Rupp for Bloomberg may be of interest to subscribers. Here is a section: 

Same-store sales fell 5 percent last quarter, excluding currency fluctuations. That was a slightly better performance than the 5.4 percent decline analysts predicted. Michael Kors expects comparable sales to decline by a low-single-digit percentage on that basis in the second quarter.

To help spur demand, the brand has been slashing prices on many of its products. Kors is contending with sluggish mall traffic and a strong dollar, which has reduced tourist spending.

The company also is adding new products in the second half and improving its digital operations.

Sales in the handbag business remain “robust,” though they aren’t growing at the same rates as previous years, executives said on the earnings conference call. Backpacks are getting more popular, and millennial customers in particular prefer smaller bags and cross-body purses, which typically have lower retail values. Watch sales also dragged down the company’s North American same-store sales, the company said.

 

Eoin Treacy's view -

Mid range luxury goods companies have been under pressure to offer more mass market offerings while even the uber-luxurious brands have been offering discounts in Hong Kong in order to spur demand. Michael Kors in particular boosted supply in order to capture market share from Coach, but suffered from the loss of its cache in doing so. Both companies are suffering from interlopers such as Tory Burch. The question now is how much of this is already in the price?



This section continues in the Subscriber's Area. Back to top
August 05 2015

Commentary by Eoin Treacy

Citigroup Sounding Alarm on $13 Billion of Bank Bonds in Brazil

This article by Filipe Pacheco for Bloomberg may be of interest to subscribers. Here is a section:

Speculation is mounting that Moody’s will be the second rating company to lower Brazil’s grade to the precipice of junk as the economy suffers its biggest contraction in a quarter century and a bribery scandal frustrates the government’s efforts to restore its finances.

Moody’s, which met with officials in Brazil last month, cited the country’s economic woes and deteriorating finances when it put the Baa2 rating on negative outlook in September.

Things have only gotten worse since then, with Moody’s predicting in a July 16 report that gross domestic product will shrink 1.8 percent this year.

Brazil’s real declined 0.7 percent to 3.4943 per U.S.dollar at 11:51 a.m. in New York. The currency declined 24 percent this year.

Just last week, Standard & Poor’s also revised its outlook on Brazil’s rating to negative. An S&P downgrade would plunge Brazil back into junk since the company rates Brazil BBB-, one level below Moody’s.

“Banks are a leveraged macro play and as such, given the recession, I see the bonds expensive,” Jorge Piedrahita, the chief executive officer of New York-based brokerage Torino Capital LLC, said in an e-mail.

Eoin Treacy's view -

The economic pressure Brazil is experiencing is perhaps most evident in the collapse of the Real which has almost completely unwound the bull market associated with the commodity bull market. The great tragedy is that the country squandered the economic dividend of an almost decade long commodity bull market by failing to introduce regulatory reform, build critical infrastructure and combat corruption. As Warren Buffett says “You don’t know who’s been swimming naked until the tide goes out” On the plus side the Olympics next year and World Cup in 2018 will be fun but are hardly relevant for investors. 



This section continues in the Subscriber's Area. Back to top
August 04 2015

Commentary by Eoin Treacy

Lifting of Foreign Ownership Limits Signals Sea Change in Vietnam's Capital Markets

Thanks to a subscriber for this article by Steve Mantle which appeared in Finalternatives and may be of interest to subscribers. Here is a section on Pakistan:

Even small gains in the weighting for frontier and ASEAN indices can have a significant effect on net foreign buying, in turn further helping market cap and liquidity.

The longer term benefit is accession to the MSCI Emerging Markets Index. MSCI announced in June they are adding Pakistan (9.2% Frontier weighting) to the review list for Emerging Market classification. The Karachi Stock Exchange (market cap $75bn) satisfies 14 of the 17 items in MCSI’s criteria. The HOSE meets just 7, although these latest reforms will help towards fulfilling 3 of the foreign ownership requirements. Additionally 2 more items, ‘clearing and settlement timescales’ and ‘investor registration and account set up’, are also being addressed in an attempt to make Vietnam more competitive.

 

Eoin Treacy's view -

Technical changes in how a market is considered by providers tend to have outsized results. Vietnam’s decision to further loosen foreign investment limits in its stock market represented an important development for its potential to represent a larger weighting in international benchmarks. 



This section continues in the Subscriber's Area. Back to top
July 31 2015

Commentary by Eoin Treacy

Noble Group Extends Worst Rout Since 1999 Amid SGX Warning

This article by Yuriy Humber and Jonathan Burgos for Bloomberg may be of interest to subscribers. Here is a section:

Noble has bought back its stock at least 11 times since last month and built up a 2.8 percent stake from zero. Companies listed in the city-state aren’t allowed to repurchase their shares two weeks before reporting earnings, according to Singapore trading rules. The company is due to announce its quarterly results on Aug. 13.

“The share buybacks so far have been relatively limited so we don’t expect immediate impact on the company’s liquidity or financial leverage,” Cindy Huang, an analyst at credit-rating agency Standard & Poor’s, said by e-mail.

Noble’s stock declines do not in themselves impact the trading company’s credit position, Huang said.

“The larger issue would be if confidence is affected or lenders’ sentiment is significantly affected,” Huang said.

 

Eoin Treacy's view -

Noble Group is currently trading on a Price to Book of 0.51 not least because its primary business is in coal, coke and petrochemical supply chains which have been under pressure as commodity prices have declined. With a forward P/E of 4 and a yield of 2.12% traders are pricing in either a major write down of their assets or are simply using the share as a vehicle for expressing a bearish view on commodities generally. 



This section continues in the Subscriber's Area. Back to top
July 22 2015

Commentary by Eoin Treacy

Textile and garment exports to TPP market up 70 per cent

This article from Vietnam News may be of interest to subscribers. Here is a section:

Viet Nam's garment and textile export turnover to countries taking part in the Trans-Pacific Partnership (TPP) negotiations increased by 69.66 per cent in the first five months compared with the same period last year, according to the latest report from the Viet Nam Textile and Apparel Association (Vitas).

Exports to this market also accounted for 66.8 per cent of the sector's total export turnover. Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the US and Viet Nam are members of the TPP.

Exports to the US ranked top with US$4.05 billion, accounting for nearly 50 per cent of the export value to the countries joining the TPP agreement, a 53 per cent increase on the year.

Viet Nam's textile and garment export turnover to the US is expected to reach $11 billion by the end of the year, Dang Phuong Dung, Vitas deputy chairwoman told Hai Quan (Customs) newspaper.
Textile and garment export turnover to the US has increased dramatically in the past 20 years from zero to $9.8 billion in 2014.

The turnover could be doubled once the TPP is signed, she said, adding that it would benefit local enterprises. Garment products' import taxes would be reduced by 7 to 8 per cent, replacing the current 15 to 16 per cent.

 

Eoin Treacy's view -

The devaluation of the Dong has been a major benefit for Vietnam’s export sector and the fact that inflation is now slowing may raise hopes that the devaluation will continue to pause. 



This section continues in the Subscriber's Area. Back to top
July 20 2015

Commentary by Eoin Treacy

Australian Banks to Hold More Capital for Mortgage Losses

This article by Narayanan Somasundaram for Bloomberg may be of interest to subscribers. Here is a section: 

Under rules coming into force on July 1, 2016, the average risk weight on residential mortgage exposures will rise to at least 25 percent from about 16 percent, the Australian Prudential Regulation Authority said in a statement. That will increase the capital requirements of the biggest four banks by about A$12 billion ($8.9 billion), according to Goldman Sachs Group Inc. and Morgan Stanley.

“The timing and magnitude of today’s announcement should come as no surprise,” Goldman Sachs analysts Andrew Lyons and Yu Chuan Leong said in a note to investors. “However, the approximately one-year time frame is shorter than we would have expected.”

The regulator is forcing banks to shore up their capital after a government review last December recommended they should rank among the top 25 percent of lenders globally. The capital increase forms part of the regulators’ attempt to ensure the financial system can cope with any downturn in the housing market, where prices have climbed almost 30 percent in the past three years.

Australia & New Zealand Banking Group Ltd. Commonwealth Bank of Australia, National Australia Bank Ltd., Westpac Banking Corp. and Macquarie Group Ltd. will be affected by the new rules, which equate to increasing minimum capital requirements by about 80 basis points, APRA said. The cost of holding more capital may force the lenders to raise their mortgage rates, according to Morningstar Inc. and Bell Potter Securities Ltd.

 

Eoin Treacy's view -

The S&P/ASX 200 Finance Index represents a weighting of 47.85% in the overall index and 43 of the 200 companies.  That’s a large weighting and therefore a potential concern. Measures to ensure the ability of the sector to withstand a downturn in its business are to be welcomed. Meanwhile Financials are likely to benefit from the prospect of additional rate cuts.



This section continues in the Subscriber's Area. Back to top
July 15 2015

Commentary by Eoin Treacy

Uniqlo Parent Forecasts Slower Japan Sales on Cool Summer

This article by Monami Yui for Bloomberg may be of interest to subscribers. Here is a section: 

Same-store sales in Japan dipped 12 percent in June as the cooler weather curbed demand for summer clothes, the company said earlier this month.

Net income surged 36 percent in the three months ended May to 27.6 billion yen, based on nine-month figures the company released Thursday in Tokyo. Sales gained 23 percent to 398.4 billion yen in the quarter.

Investors have bet billionaire Tadashi Yanai’s clothing retailer, which offers basic designs made with advanced materials at low prices, will grow by exporting its model to faster-growing markets like China and the U.S.

The shares trade at about 41 times projected earnings, compared with about 31 times for Inditex, which sells Zara casual clothes and is Uniqlo’s bigger global rival and 24 times for Hennes & Mauritz AB, which retails the H&M brand.

 

Eoin Treacy's view -

As the largest company in the price weighted Nikkei-225, Fast Retail exerts an influence on the direction of the overall market. As it expands internationally, the company will be consolidating more foreign earnings into a Yen which continues to weaken. 



This section continues in the Subscriber's Area. Back to top
July 06 2015

Commentary by Eoin Treacy

Correction seen after growth

This article from VietnamNews.com may be of interest to subscribers. Here is a section

Also, last week's opening of the State Securities Commission investment promotion conference in the United States helped bolster domestic investors' psychology. Leaders of the Ministry of Finance and the commission presented new policies to help upgrade the Vietnamese investment environment, including newly-issued Decree 60 which allows foreigners to raise their stakes in Vietnamese listed companies.

Meanwhile, Minister of Finance Dinh Tien Dung said the ministry would soon issue a circular to provide instruction to implement Decree 60 in July. This eased investor concerns about the delay in the implementation of the raising foreign room regulation.

The foreign sector reacted positively to this movement, causing an increase. They picked up the combined net buy values of more than VND1.1 trillion ($50.5 million) worth of shares in the two markets, of which 90 per cent of their purchases focused on the HCM City market's shares.

"Although the market outlook remains in an uptrend in the medium- and long-term period, the markets remain exposed to substantial risks of a short adjustment this week," analysts at Bao Viet Securities Co wrote in a report. They added that the market rallies would heavily depend on leading stocks and foreign movements in the context that domestic money flows were still modest.

 

Eoin Treacy's view -

Foreign investment interest in Vietnam has been curtailed by restrictions on ownership of shares. Once the limit on ownership was hit there was no way to buy more and it was difficult to sell because there was the risk that it would be impossible to re-enter the position later. The prospect of Vietnam removing or at least loosening ownership limits represents a potentially important catalyst for the market not least if it helps gain admittance to the MSCI Emerging Market Index.  



This section continues in the Subscriber's Area. Back to top
July 03 2015

Commentary by Eoin Treacy

Vietnam Communist Party Chief Trong to Meet Obama in U.S

This article by John Boudreau and Nguyen Dieu Tu Uyen for Bloomberg may be of interest to subscribers. Here is a section: 

“They have to reach out to the U.S.,” Vuving said by phone, speaking of Vietnam. “They need to do something to strengthen Vietnam’s capability to stand up to China. It has reached a tipping point.”
Trong said Vietnam “appreciates” statements from the U.S. supporting a peaceful approach to settling disputes between claimant states to the South China Sea, through which some of the world’s busiest shipping lanes run.

“We are all aware of the strategic location of the East Sea,” he said, using Vietnam’s term for the South China Sea.

“I hope that the U.S. will continue to have appropriate voice and actions to contribute to peaceful settlement of disputes in the East Sea in accordance with international law.”

Trong is viewed as friendlier toward China than the U.S., and thus his visit to the U.S. is even more significant, Le Dang Doanh, an economist and former government adviser in Hanoi, said by phone. While Vietnamese leaders have increased their meetings with U.S. officials, they also often visit China.

 

Eoin Treacy's view -

Vietnam has a long coast line and an interest in what goes on in the South China Sea not least because of the resources to be found underneath it. Sitting between major power blocks such as China, India and Japan, Vietnam has an incentive in developing as many friends, with an interest in seeing the country flourish as an independent nation, as possible. The decision to expand the ability of foreign investors to hold positions in corporations can be viewed in this context in addition to the stated aim of MSCI Emerging market membership.



This section continues in the Subscriber's Area. Back to top
July 03 2015

Commentary by Eoin Treacy

Platinum into the next decade

Thanks to a subscriber for this detailed report offering a nuanced view on the platinum market which may be of interest. Here is a section: 

The world still needs more platinum despite the fall in Autocat loadings
The rise in electric vehicles (EV’s with very low or no PGM’s) will reduce the average vehicle platinum loading and contribute to lower demand growth than we have seen historically. Importantly however, under what we consider reasonable (2.6% CAGR) vehicle demand growth, we still forecast growth in gross Autocat demand. A modest increase in fuel cell vehicles (with high platinum loadings) is likely to offset some of the platinum demand destruction from EV’s. Furthermore a “catch-up” in emission standards in the emerging markets such as India and China should also offset the general trend in declining loadings. We outline our forecasts for platinum. Under our base case, we forecast that an additional 1.5Moz will be required by 2030.

The Auto sector is nearly self sufficient due to recycling.
We forecast a continuation in the trend of the increasing metal units being returned to the market over the next fifteen years. The three major Autocat producers (BASF, Johnson Matthey and Umicore) are all adding recycling refining capacity, specifically targeting recycled material. Furthermore, the tranches of Autocats being returned to the market over the next few years all have higher PGM loadings, especially in platinum. We forecast Autocat platinum volumes to double by 2030, which equates to a CAGR of 4%. 

However, the CAGR between 2014 and 2021 is likely to be closer to 8%.
We estimate that the Autocat industry will be a net supplier to the market up until 2020, whilst the additional new ounces required by 2025 will be negligible. By 2030, the additional requirement should be 300koz, equivalent to a large platinum mine, or a two mid-sized mines. The net result is that Platinum demand (post recycling) growth should be slower over the next fifteen years, compared to the historical trend. We estimate a CAGR of 1.1% versus the trend (1975 – 2014) of 2.2%.

Enough replacement ounces from the existing supply base until 2021
The amount of new platinum ounces required from the Southern African mining industry is limited, especially over the next seven years. The existing fleet of development and replacement projects should be sufficient to offset the endemic grade decline and mine depletion (see Figure 6). Furthermore, these projects have favourable economics relative to the current production base, as most projects have also sunk significant capex, lowering the return requirement as a result.

 

Eoin Treacy's view -

The automotive sector is in a process of evolution with China mandating greater use of electric vehicles and tighter emission control while Tesla represents the cool side of the sector. Toyota, Linde, among others, and the platinum miners are championing the build out of hydrogen fuel cells. Both represent corollaries to innovation of solar and wind technology that is making distributed electricity production possible. Sergio Marchionne at Fiat is arguing for fabless manufacturing in the automotive sector which has the potential to act as an additional catalyst for the sector. 



This section continues in the Subscriber's Area. Back to top
July 02 2015

Commentary by Eoin Treacy

Corn Market Seen Tighter as Pigs Erode Reserves at 27-Year High

This article by Jeff Wilson for Bloomberg may be of interest to subscribers. Here is a section: 

“It’s probably a combination of more pigs, chickens and cows eating corn, and USDA overestimating last year’s production,” said Dale Durchholz, the senior market analyst at AgriVisor in Bloomington, Illinois. “Supplies are tighter, and God forbid we have any hot, dry weather in July that damages this year’s crop.”

Feed and residual use for the grain in the three months ended in May climbed 31 percent, according to AgriVisor. The inventory of broilers, dairy cows and hogs suggests that such demand could be as much as 200 million bushels larger than the 5.25 billion bushels projected by the USDA, said Durchholz.

As of Sunday, 68 percent of the corn crop was rated in good or excellent condition in the top 18 producing states, down from 75 percent a year earlier.

Wet fields and declining crop conditions suggest a national yield at 162 bushels an acre, below the USDA’s estimate of 166.8 bushels,  Mark Schultz, the chief analyst for Northstar Commodity Investment Co. in Minneapolis, said Tuesday. That would leave a carryover next year of 1.2 billion bushels, below the 1.771 billion that the USDA forecast on June 10.

“The tightening supply and deteriorating crops in the field are a big change from the outlook a month ago,” Schultz said. “Most livestock producers were waiting for lower prices into the harvest, and now they will be scrambling to extend purchases.”

 

Eoin Treacy's view -

El Nino is a major weather phenomenon and this year’s event is expected to be stronger than normal. With droughts in some parts and floods elsewhere the potential for crop yields to undershoot is being priced into agricultural commodities. There has been a significant rally in corn, wheat and soybean prices which is a little overbought in the short term. There is room for some consolidation but clear downward dynamics would be required to question potential for some additional upside. 



This section continues in the Subscriber's Area. Back to top
July 02 2015

Commentary by Eoin Treacy

Centene to Buy Health Net in $6.3 Billion Health-Care Deal

This article by Zachary Tracer for Bloomberg may be of interest to subscribers. Here is a section: 

Aetna Inc. is said to be nearing an acquisition of Humana Inc., Bloomberg reported last week. And on June 20, Anthem Inc. went public with a bid for Cigna Corp. UnitedHealth Group Inc., the largest U.S. health insurer, could also make a bid for Aetna.

It’s also possible UnitedHealth could jump in with a competing offer for Health Net, said Ana Gupte, an analyst at Leerink Partners LLC.

Centene will assume about $500 million in debt as part of its transaction with Health Net, which the companies expect to close in early 2016. The buyer plans to fund the purchase using its existing cash and debt financing, with Wells Fargo & Co. providing $2.7 billion in financing commitments, the companies said.

The combined company would have more than 10 million members and an estimated $37 billion in pro forma premium and service revenues for 2015, and the acquisition would boost earnings by about 10 percent in the first year, according to the statement.

 

Eoin Treacy's view -

The Supreme Court’s decision on June 25th to strike down the most recent challenge to subsidies under the Affordable Care Act has acted as a green light for M&A activity in the health insurance market. Health insurers have been some of the greatest beneficiaries of Obamacare and the removal of a major challenge to its permanence is great news for the sector. 



This section continues in the Subscriber's Area. Back to top
July 01 2015

Commentary by Eoin Treacy

U.S. Justice Department Opens Antitrust Probe Into Airlines

This article by David McLaughlin may be of interest to subscribers. Here is a section:

U.S. airline shares tumbled, erasing an earlier gain, after the initial Associated Press report on the inquiry. Citing a document, the AP said the department was investigating whether carriers were colluding to help prop up airfares.

The Bloomberg U.S. Airlines Index slid 4.7 percent, the biggest intraday drop since June 8, at 2:03 p.m. in New York. The gauge rose as much as 1.7 percent earlier.

Messages left with the four largest U.S. carriers -- American Airlines Group Inc., United Continental Holdings Inc., Delta Air Lines Inc. and Southwest Airlines Co. -- weren’t immediately returned.

Eoin Treacy's view -

Airlines have benefitted enormously from the fall in oil prices, the recovering economy and consolidation in the aftermath of the credit crisis. If you have booked a summer holiday in the last month you will have noticed that the price of airline tickets has not come down and differences in pricing between airlines is almost non-existent. Little wonder then that the Justice Department is asking why?

 



This section continues in the Subscriber's Area. Back to top
June 29 2015

Commentary by Eoin Treacy

Vietnam Eases Foreign Ownership Caps as MSCI Upgrade Sought

This article by Nguyen Kieu Giang for Bloomberg may be of interest to subscribers. Here is a section: 

Vietnam eased curbs on foreign ownership as the government seeks to boost inflows to the nation’s stocks and an upgrade to emerging-market status.

Overseas investors can increase holdings in “a number” of industries to 100 percent from 49 percent effective in September, according to a government decree published late Friday. Other companies will keep their 49 percent limits, while holdings in sectors that are governed by separate ownership regulations such as banks will remain at 30 percent, according to the decree.

The restrictions have been “a major hurdle” to developing the capital markets and deterred many foreign investors, said Andy Ho, chief investment officer of Ho Chi Minh City-based VinaCapital, which manages about $1.4 billion in assets.

Money managers including Templeton Asset Management and Dragon Capital Group Ltd. have said they’re unable to buy as many equities in Vietnam’s $58 billion market as they want because of the caps. The plan to ease restrictions was delayed last year after originally being proposed in 2013.

Vietnam is building its case for an upgrade to emerging- market status from frontier classification by index provider MSCI Inc., the State Securities Commission said in October. An emerging-market ranking, which would increase the pool of eligible investors for Vietnam, requires “significant” openness to foreign ownership and ease of capital flows, as well as minimum levels of liquidity and market value, according to MSCI’s website.

 

Eoin Treacy's view -

Vietnam holds a great deal of promise with a competitive manufacturing sector, proximity to China’s markets and a government which is attempting to reform. However continued inflation is evident in the devaluation of the Dong which remains on a downward trajectory. An easing of restrictions on foreign ownership has long been anticipated by investors but would probably have been more beneficial almost three years ago when it was first mooted. Nevertheless it is good news. 



This section continues in the Subscriber's Area. Back to top
June 26 2015

Commentary by Eoin Treacy

Indonesia May Replace Economics Team, Vice President Says

This article by Ben Otto for the Wall Street Journal may be of interest to subscribers. Here is a section: 

But growth has slipped to its lowest level in more than five years, and Mr. Widodo’s team, in place for almost eight months, has failed to arrest the fall. Indonesia’s stock index recently hit its lowest level in more than a year, wiping out all gains made since Mr. Widodo’s election. Lackluster corporate earnings were partly the cause, along with waning confidence in the president’s ability to shepherd his team to quickly implement his program.

Mr. Kalla acknowledged the economy was a problem, and said one of his and the president’s priorities is to speed up spending on stalled infrastructure projects that are expected to inject billions of dollars into the economy. He pointed to a new law that makes it easier for the state to acquire land -- a long-standing sticking point for projects ranging from power plants to factories. The new rules are set to pave the way for a Japanese-funded $4 billion power plant to proceed after years of delay, Mr. Kalla said.

As falling global oil prices cut into Indonesia’s oil-gas revenue, and tax collection so far coming up far short of targets, the government is working to attract more foreign direct investors. Mr. Kalla said that many companies “don’t need more incentives” to invest in Indonesia, pointing to the large population and low labor costs that attract consumer companies and manufacturers. He said the government is trying to address old problems of acquiring permits for foreign workers, improving the roads and access to electricity, and helping to clear land.

 

Eoin Treacy's view -

Unfortunately for Widodo he did not receive the groundswell of support that Modi did in India which would have given him carte blanche to implement his reform agenda. Political infighting and obfuscation have characterised the environment in Indonesia since before Widodo’s victory. Despite the fact a number of the policies he fought for have grudgingly been implemented, perceptions are that little has been achieved. 



This section continues in the Subscriber's Area. Back to top
June 25 2015

Commentary by Eoin Treacy

Brazil Bank Stock Goes From Worst to First After Investors Bail

This article by Francisco Marcelino and Ney Hayashi for Bloomberg may be of interest to subscribers. Here is a section: 

Among the largest Brazilian banks, Santander is the one with the highest capital ratios, Victor Martins, an analyst at Planner Corretora de Valores, said by phone from Sao Paulo.

“If the economy picks up, they’ll be in a better position to take advantage of that,” Martins said. “It’s all in their hands to do it.”

Santander Brasil’s capital ratio of 16 percent compares with 16.02 percent at Banco do Brasil SA at the end of the first quarter. It exceeded Itau’s 15.3 percent and Banco Bradesco SA’s 15.2 percent.
Santander declined to comment on its performance since the share-swap offer, which began in April 2014. That’s when the bank offered to buy back the 25 percent stake in the Brazil unit it didn’t already own at a price 20 percent above where it was trading at the time. The deal was to exchange shares of the local unit for those of the parent.

The majority of analysts covering the company recommended investors accept the offer, citing what they saw as a fair price and the risk of holding a stock with low liquidity.

“The market doesn’t believe in our franchise, but we do,” Javier Marin, Banco Santander’s chief executive officer when the deal was announced, told reporters at the time. “That’s why we’re carrying out this transaction.”

 

Eoin Treacy's view -

Brazil remains mired in a political scandal which throws light on the inadequate standards of governance that prevailed over the last decade. Now that commodity prices have fallen and excess capital from exports has dried up, the ability of the economy to thrive without reform in how the country is administered is in question. The Real offers a powerful representation of just how much stress the economy is under. It has more than halved since 2011. Some additional evidence of steadying would be a welcome development from the perspective of foreign investors. 



This section continues in the Subscriber's Area. Back to top
June 24 2015

Commentary by Eoin Treacy

Ahold Deal Would Create One of the Largest U.S. Grocery Chains

This article by Chad Bray for the New York Times may be of interest to subscribers. Here is a section: 

The Dutch supermarket operator Ahold and the Delhaize Group of Belgium said on Wednesday that they had agreed to an all-share merger that would create one of the largest supermarket chains in the United States.

The deal would combine Delhaize, the owner of the American supermarket chains Food Lion and Hannaford, with Ahold, which owns the Stop & Shop and Giant stores in the United States, amid increasing competition in the grocery sector.

The combined company would be called Ahold Delhaize and would be worth about 26.2 billion euros, or about $29.5 billion, based on market capitalization. It would have more than 6,500 stores and 375,000 employees in the United States and Europe, and sales of €54.1 billion.

The companies, while based in Europe, generate more than half their sales in the United States. The deal is expected to allow them to compete better with the likes of Walmart Stores, the world’s largest retailer, and with discount grocers such as the German companies Aldi and Lidl, and Costco in the United States.

Eoin Treacy's view -

Economies of scale represent a major competitive advantage in a market where inefficiency represents higher costs consumers will simply not accept. While Ahold sold off its Asian and Latin American operations in the 1990s as a result of an accounting crisis, Delhaize still has its Indonesian unit. The merged companies will have substantial footprints in both Europe and the USA. 



This section continues in the Subscriber's Area. Back to top
June 23 2015

Commentary by Eoin Treacy

The Way Humans Get Electricity Is About to Change Forever

This article by Tom Randall for Bloomberg may be of interest to subscribers. Here is a section: 

The price of solar power will continue to fall, until it becomes the cheapest form of power in a rapidly expanding number of national markets. By 2026, utility-scale solar will be competitive for the majority of the world, according to BNEF. The lifetime cost of a photovoltaic solar-power plant will drop by almost half over the next 25 years, even as the prices of fossil fuels creep higher.

Solar power will eventually get so cheap that it will outcompete new fossil-fuel plants and even start to supplant some existing coal and gas plants, potentially stranding billions in fossil-fuel infrastructure. The industrial age was built on coal. The next 25 years will be the end of its dominance.  

2. Solar Billions Become Solar Trillions
With solar power so cheap, investments will surge. Expect $3.7 trillion in solar investments between now and 2040, according to BNEF. Solar alone will account for more than a third of new power capacity worldwide. Here's how that looks on a chart, with solar appropriately dressed in yellow and fossil fuels in pernicious gray:  

3. The Revolution Will Be Decentralized 
The biggest solar revolution will take place on rooftops. High electricity prices and cheap residential battery storage will make small-scale rooftop solar ever more attractive, driving a 17-fold increase in installations. By 2040, rooftop solar will be cheaper than electricity from the grid in every major economy, and almost 13 percent of electricity worldwide will be generated from small-scale solar systems.

 

Eoin Treacy's view -

The pace of technological innovation in solar is rapid and the argument that Moore’s law is applicable is gaining ground as the sector attached increasing research and development spending. The difficulties reported in getting the Ivanpah concentrated solar facility, in the Mojave Desert, up to peak performance is a setback suggesting the time required to deliver new technologies might be longer than some are currently envisaging. Here is a section from a Huffington Post piece dated November 17th: 

"During startup we have experienced ... equipment challenges, typical with any new technology, combined with irregular weather patterns," NRG spokesman Jeff Holland said in a statement. "We are confident that Ivanpah's long-term generation projections will meet expectations."

The technology used at Ivanpah is different than the familiar photovoltaic panels commonly used for rooftop solar installations. The plant's solar-thermal system — sometimes called concentrated-solar thermal — relies on nearly 350,000 computer-controlled mirrors at the site, each the size of a garage door. 

 



This section continues in the Subscriber's Area. Back to top
June 22 2015

Commentary by Eoin Treacy

2015 Midyear Outlook, Key Takeaways

Thanks to a subscriber for this report from Wells Fargo which may be of interest. Here is a section: 

We believe earnings momentum is building in the European and Japanese equity markets, and this trend may be the catalyst for higher equity markets, and this trend may be the catalyst for higher equity returns for the remainder of the year. Developed markets should benefit from gradual economic improvements in these regions. Corporate earnings reversions in these markets have turned positive for the first time since 2011. In addition to supporting business and consumer sentiment, another round of quantitative easing (QE) measures launched by the European Central Bank (ECB) and Bank of Japan (BoJ) should provide a nice cushion for equity prices. Equity valuations have increased ahead of improvements in fundamentals and earnings, and stocks are no longer priced as cheaply as they have been in prior years. The MSCI Europe, Australiasia and Far East (EAFE) Index, a primary measure of equity market performance of developed markets outside of the U.S. and Canada, trades at 16.08 times our 2015 estimate. We estimate that price multiples may stay somewhat elevated as investors await the profit cycle to accelerate. 

We are maintaining our overweight to developed market equities. Key risks to this view that bear watching include another rapid slide in the euro against the U.S. dollar, a relapse of economic weakness, particularly in Europe and Japan, and a dip in corporate earnings. Inflated equity market valuations could become a relevant headwind if we do not see earnings growth start to rebound. 

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

The drama, or melodrama, of the unfolding situation in Greece has obscured the fact that two of the largest central banks in the world are engaged in outsized quantitative easing programs. As David has said for years “monetary policy trumps just about everything else most of the time” As potential for a deal between Greece and its creditors looks more likely, the attention of investors is returning to the fountain of liquidity coming from the ECB and BoJ. The relative weakness of bonds is potentially reflective of some liquidation of safe haven positions while the bounce in equities will be pressuring shorts. 



This section continues in the Subscriber's Area. Back to top
June 19 2015

Commentary by Eoin Treacy

Ireland

Eoin Treacy's view -

The whole world is focused on Greece with theatrics among the main participants escalating as we approach the next deadline. The ECB has finally engaged in looser monetary policy which is only likely to get more lax if Greece in fact exits the currency union. An export led economy such as Ireland’s remains a beneficiary of these developments no least because of the relative weakness of the Euro.    



This section continues in the Subscriber's Area. Back to top
June 18 2015

Commentary by Eoin Treacy

Basel 4 - Truth and Advertising

Thanks to a subscriber for this report from Deutsche Bank which may be of interest. Here is a section: 

In our base case, we expect sector RWA inflation of 14% or EUR 1.2tn. We expect a Basel 4 ratio of 9.9% on 2015, a 1.7% reduction from Basel 3, or EUR 120bn in equity. Given sector 2017 profits of EUR 130bn and 2019 implementation period, we think on average the sector is well placed to absorb the changes. By country, Nordics have the highest B4 ratios and France the lowest. Despite having the highest RWA inflation, Nordics still end up with the strongest B4 ratio because of high pre-existing buffers. France has the lowest B4 ratio by country given starting points and RWA inflation.

A wide range of outcomes is still possible depending on finalization
The range of outcomes could be wide, or impact sooner, depending on how the proposals are finalized. Two risks are; i) more granular, portfolio-based, RWA floors could lift sector RWA inflation to 22% and catch out more banks costing a further 0.6% of CT1; ii) national regulators may move faster than 2019 on harmonizing RWA by adjusting banks’ internal models tackling so called model risk. Our feedback is that management may have this higher up the immediate agenda because it may come sooner. In our 9 June 2014 Truth in Advertising report we looked at the issue of model risk.

We screen stocks on Basel 4 and potential for payout surprise
Despite finalization of rules in the next year, and implementation not before 2019, guidance from banks will likely impact perceptions around capital and payout. Stocks we like on our base case are Lloyds, Unicredit, Banco, Danske, CBK and Bankinter. For Unicredit and CBK in particular, perceptions around relative capital strength could be weak, wrongly in our view. Our analysis shows they are better placed on Basel 4 than some may think with reasonable valuation. Out of this list, Lloyds and Banco could be more impacted if we get a tougher implementation of more granular RWA floors.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

European banks were decimated by the financial crisis and the ongoing lack of appetite for consumer credit remains a headwind. Nevertheless, if the USA is any guide the introduction of a concerted effort to inflate money supply and steepen the yield curve should help some of the better positioned banks back onto a growth trajectory over the medium term. 

The Europe STOXX 600 Banks Index (P/E 22.3, DY 3.61%) rallied to new four-year highs following the introduction of the ECB’s QE program and has been consolidating that gain since. It found at least near-term support today in the region of the 200-day MA. 

 



This section continues in the Subscriber's Area. Back to top
June 18 2015

Commentary by Eoin Treacy

Piercing the gloom

Thanks to a subscriber for this report from Deutsche Bank which may be of interest to subscribers. Here is a section:

China is decelerating – (a fairly consensual view) and this is coinciding with additional production ramp-up as projects started years ago come to fruition. The net outcome is over supply (again, a consensual view) and prices should fall (as they have done). A risk is to use pre China boom commodity prices as a guide to the future, because this is too bearish as many commodity prices hit century lows in the early 2000’s. Iron ore hit an annual low in 2002 for instance at US$36/t (real CIF) – so market fears of sustained iron ore prices of US$30-40/t would require iron ore to retrace to century low levels, into perpetuity. We do not think this is likely. Meanwhile, a number of the miners offer good value on their existing assets alone at normalised prices, the potential growth upside and high yields justify buying them – on top of that, dividends are both attractive and maintainable into the foreseeable future. Now is a good time to selectively pick up some value, in our view.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

Investment in new green field projects has stopped and is unlikely to become a significant factor until there is evidence metal prices are tending higher. Having embarked on developing new mines, companies have little choice but to complete the projects and these sources of supply continue to come to market. This situation favours lower cost, more established companies. 

There is an important difference between Chinese demand growth and absolute demand. As a major economy, per capita demand has increased substantially over the last decade. A great deal of mine expansion was predicated on the trend of demand growth persisting indefinitely. The pace of growth has moderated considerably but there is no evidence it has reversed. Any major economy has an annual consumption rate for industrial resources. Generally speaking, commodity bull markets don’t end because demand decreases. Rather supply increases to overwhelm demand. This is exactly what we have seen happen and a new demand growth model will have to evolve in order to change the environment. 

 



This section continues in the Subscriber's Area. Back to top
June 11 2015

Commentary by Eoin Treacy

Email of the day on the lack commonality in luxury goods companies

I read this article about luxury goods in today's FT  and then ran through your luxury goods section in your Favourites in the Chart Library. I cannot see a common pattern in the charts. Since this a major element of what you teach in the Chart Seminar, I would like your thoughts on this particular case.

Eoin Treacy's view -

Remy Cointreau was among the greatest beneficiaries of the largesse of Chinese officialdom since its expensive liquors were consumed at so many dinners. This all came to a halt in 2013 when Xi Jinping’s corruption crackdown gained traction. Conspicuous consumption suddenly became unfashionable as bloggers posted photos of cadres wearing luxury watches. This was highlighted most poignantly at this year’s annual Party meeting when a number of high profile wives of senior officials were seen holding cheap plastic handbags rather than the Chanel and Hermes bags of previous years. 



This section continues in the Subscriber's Area. Back to top
June 10 2015

Commentary by Eoin Treacy

Vale Outlook for China Sends Ibovespa to Biggest Gain in World

This article by Julia Leite for Bloomberg may be of interest to subscribers. Here is a section: 

“Several Chinese producers -- a higher number than people realize -- have already left the business,” Vale’s Ferreira, said Wednesday at a Rio de Janeiro conference. “I think we will have a better second half in China than the first half in terms of steel.”

On top of raw-material shares, banks also helped push the Ibovespa higher. Banco Bradesco SA recovered from an 11-month low while Itau Unibanco Holding SA was set for the best day since February. Still, Fides’ Vieira said the advance may not be sustained as Latin America’s largest economy continues to disappoint.

Inflation has accelerated as President Dilma Rousseff increases government controlled prices to shore up public accounts. That has sent annual consumer prices to the fastest pace in more than a decade, and the central bank has responded by boosting borrowing costs six consecutive times.

Bets on a further slowdown at a time when the economy is already forecast to show the worst recession in 25 years have dragged down the Ibovespa from this year’s high. The benchmark gauge had entered a bull market April 24, after rallying more than 20 percent from its 2015 low, on speculation government measures would revive growth and help Brazil keep its investment-grade credit rating.

 

Eoin Treacy's view -

The Brazilian market has been the subject of a number of challenges over the last couple of years not least the collapse in iron-ore and coal prices and the entanglement of the current administration in Petrobras’s corruption scandal. 

The Index has been rangebound, in nominal terms, for much of the last two years and found support today in the region of the 200-day MA. A sustained move below 52.500 would be required to question current scope for some additional upside. 

 



This section continues in the Subscriber's Area. Back to top
June 08 2015

Commentary by Eoin Treacy

June 03 2015

Commentary by Eoin Treacy

Finally! The yen breaks 30-year support, a new round of currency turmoil begins

Thanks to a subscriber for this report by Albert Edwards for SocGen which may be of interest. Here is a section: 

Why is China’s lurch into deflation on the GDP deflator, but not the CPI measure, so important? We have pointed out before (unfortunately we don’t have space for the chart here) that in Japan during the 1990s the thing to watch to see the havoc that deflation was wreaking on nominal revenues and debt/income loads was not the CPI, but rather the GDP deflator, which fell far faster than the CPI. Economic agents produce far more than just consumer goods and services and the GDP deflator is a much wider basket of goods and services and includes exports and investment goods. Clearly the descent into outright GDP deflation in China explains the more aggressive, even slightly panicky, policy easing measures there.

We also pointed out last week that China’s move into BoP deficit imposes a substantial monetary headwind on the economy. China may wish to keep the renminbi stable at this time while the IMF is currently considering including it in the SDR currency basket. But the economy is simply not in a position to withstand a major yen decline bringing down the currencies of its competitors in the region (and the additional deflationary impulse). I remain convinced that China must start guiding its currency down against the dollar and it can do that easily now it has a BoP deficit by doing absolutely nothing (ie not intervening any longer to hold it up)! China will also take the IMF’s recent declaration that the renminbi is no longer undervalued as justification for these actions - link.

Worrisome deflation is already being imported into the US, especially from Japan (see chart below). China (blue line) has yet to participate, but a further round of Asian devaluations will inevitably see waves of deflation heading westwards – as in 1997/98. Watch this data closely.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber;'s Area. 

The Yen has been a catalyst for competitive currency devaluation across the Asian region since the BoJ initiated its QE program in 2012. As the Yen extends its downtrend there is potential that it will act as an additional incentive for regional competitors to devalue their currencies.

The US Dollar broke out against the Yen last week and a sustained move below ¥122 would be required to begin to question medium-term scope for continued upside. 



This section continues in the Subscriber's Area. Back to top
June 03 2015

Commentary by Eoin Treacy

GDP growth, miners not enough to boost market

This article by Stephen Cauchi for the Sydney Morning Herald may be of interest to subscribers. Here is a section:

"Today's GDP data underscores why we shouldn't be too concerned about the economy right now," Aberdeen Asset Management senior investment manager Jasmin Argyrou said. "Some of the worrying trends in confidence we saw late last year have reversed and although investment activity is subdued, household consumption has held up surprisingly well. This is ultimately the key for the investment outlook."

The reason the sharemarket did not respond to the data, Credit Suisse analyst Damien Boey said, was that investors are focused primarily on yield rather than growth. "Stocks have reached a point where changes to the earnings outlook or the GDP outlook at the margins don't really have a big impact, given that valuations are kind of extended," he said. "Maybe they're looking for more rate cuts as the only way up."

Bond yields rose on Wednesday and that was enough to send the market lower, he said.

 

Eoin Treacy's view -

Australian investors have been heavily invested in high yielding domestic shares, primarily banks, in order to benefit from full franking. The relative value proposition has also been bolstered by historically low interest rates and a resources sector which has been a subpar performer since 2009.

Australian 10-year government bond yields share a high degree of commonality with their other developed market counterparts. The yield has jumped over the last couple of weeks to break the yearlong progression of lower rally highs and is now trading in the region of the 200-day MA. The 3% area represents an area of prior resistance and a sustained move above it would confirm more than temporary supply dominance. 



This section continues in the Subscriber's Area. Back to top
May 29 2015

Commentary by Eoin Treacy

No One Knows Cable Like John Malone

This article by John Malone for Bloomberg may be of interest to subscribers. Here is a section: 

Most of Malone’s $8.6 billion net worth can be traced back to that decision. Well, that and a whole bunch of other decisions that followed. TCI shareholders enjoyed a 5,000-fold gain from 1974 to the end of 1997, Robichaux calculated. In his book “The Outsiders,” private-equity manager Will Thorndike describes Malone as one of a rare breed of CEOs who act mainly as capital allocators -- disciplined enough to buy when the price is low and sell when it is high. Thorndike also offers this Malone quote from 1982: “The key to future profitability and success in the cable business will be the ability to control programming costs through the leverage of size.”

Eoin Treacy's view -

YouTube celebrated its 10-year anniversary today. I was discussing that fact with my daughters on the way to school this morning. My eldest was 9 in March so she has a hard time understanding that a world without Wi-Fi and iPhones was all we had before she was born. She aspires to being a computer game programmer when she grows up but what she and her younger sister want now is their own YouTube channel. The fact that such a feat is within reach of young children is an additional testament to how much the world has changed.

They and their friends consume most of their media content online rather than from TV channels. This has to be music to the ears of people like John Malone. They now pay nothing for a considerable portion of the content being consumed by their customers and as a result can force tougher terms on the content they do pay for. Regardless of what content you consume, cable or Wi-Fi access is a prerequisite. 



This section continues in the Subscriber's Area. Back to top
May 15 2015

Commentary by Eoin Treacy

Netflix Tops $600 a Share, Said to Be in Talks to Enter China

This article from Bloomberg may be of interest to subscribers. Here is a section: 

Entering China would let Netflix, the broadcaster of “House of Cards” and “Orange Is the New Black” take advantage of what’s forecast to be explosive growth in online TV in the nation of 1.4 billion people. The market is estimated to almost triple to 90 billion yuan by 2018, according to Shanghai-based Internet consultant IResearch.

A local partnership would be essential given the Chinese government’s strict controls over licensing for online content. Netflix wants a partner that has licenses for content on all devices -- including mobile phones, computers and set-top boxes, according to the people. China’s State Administration of Press, Publication, Radio, Film and Television has given Internet TV licenses to seven companies, including Wasu.

Wasu didn’t respond to an e-mail seeking comment. Two phone calls to Wasu’s general line weren’t answered.

 

Eoin Treacy's view -

Gaining a foothold China would be a major prize for Netflix but it will have to tread carefully and approach the right partner if it is to succeed in this venture. Additionally there are a number of Chinese competitors it will need to face down regardless of which partner it chooses. 



This section continues in the Subscriber's Area. Back to top
April 27 2015

Commentary by Eoin Treacy

Indonesian Stocks Decline Most Since 2013 on Earnings Concerns

This article by Harry Suhartono and Kyoungwha Kim for Bloomberg may be of interest to subscribers. Here is a section: 

“Corporate results from some of the largest Indonesian companies confirmed that the economy is weakening,” said Audrey Goh, Singapore-based investment strategist at Standard Chartered Bank. There’s probably “some negative sentiment” from the planned executions, she said.

President Joko Widodo’s resumption of executions for drug smugglers after a hiatus under his predecessor has increased international focus on Southeast Asia’s largest economy and the world’s fourth-most populous nation. Australia, which has a history of spats with its northern neighbor, has warned the deaths may damage ties and hasn’t ruled out sanctions or diplomatic action.

 

Eoin Treacy's view -

Joko Widodo does not have a wide margin of support in parliament so there is the possibility that the resumption of executions for drug smuggling represent an attempt to bolster his strongman credentials as the economy weakens. Commodities continue to represent a major source of income for the Indonesian economy despite the increasing potential for growth in the consumer economy. The fall in oil, tin and coal prices all represent headwinds but the possibility of the country attracting negative attention as a result of executions represents an additional issue.  



This section continues in the Subscriber's Area. Back to top
April 24 2015

Commentary by Eoin Treacy

Amazon, Microsoft Profit From Cloud as Nasdaq Reaches Record

This article by Tom Giles for Bloomberg may be of interest to subscribers. Here is a section: 

Minutes after the Nasdaq Composite closed at a record, three of the biggest bellwethers in technology reminded the market precisely why investors are so bullish on companies that do business through the Web.

Amazon.com Inc. for the first time broke out sales from its division that sells computing power and software via the Internet, reporting a 49 percent jump last quarter. Microsoft Corp. posted profit that topped analysts’ estimates, also underscoring healthy demand for software delivered through the cloud. Google Inc. benefited from rising volume of online ads.

The numbers are a testament not only to the endurance of the Internet as a conduit of commerce and information, but also to the ways it has revolutionized how the world’s biggest corporations operate. All three companies have been at the heart of these changes since the Web’s inception as a business tool, and are now vying for a bigger slice of the still-fledgling market for cloud computing.

Google is seeking to extend its lead in online search and advertising, Amazon is spending billions of dollars to expand in e-commerce and data centers, and Microsoft is building on its dominance of the business-software market.

“We are innings one or two of the cloud,” said Kim Forrest, an analyst at Fort Pitt Capital Group Inc., which oversees about $1.8 billion in Pittsburgh.

 

Eoin Treacy's view -

This is a big day for the Nasdaq. Back in 2003 no one anticipated the Index would surmount its bubble peak in little more than a decade. Of course the relative weightings of the Index have changed almost beyond recognition in that time but above all else, the Nasdaq’s performance is a testament to how successful the USA is at creating companies that fill market niches we never knew existed. 



This section continues in the Subscriber's Area. Back to top
April 21 2015

Commentary by Eoin Treacy

Buttered Coffee Could Make You Invincible. And This Man Very Rich

This article by Gordy Megroz for Bloomberg may be of interest to subscribers. Here is a section: 

He calls the mixture Bulletproof coffee. Drink it, the name implies, and you’ll feel invincible. “Fats and caffeine help stimulate the brain,” Asprey says in his office, taking another sip. The coffee, along with the drug cocktail he’s just downed, which includes vitamins K and C as well as aniracetam, a pharmaceutical designed to improve brain function, is intended to provide hours of enlightenment. “There’s a sense of cognitive ease, where everything you want to say is at the tip of your tongue,” he says. “It’s like getting a new computer—you never want to go back to the old one.”

Eoin Treacy's view -

In the videos on Mr.Asprey’s website he is sporting the near ubiquitous beard of the hipster generation and his fad is likely to be popular among those searching for the next new health craze. The evolution of demand for grass fed dairy and beef products could not be more welcome news for Irish and New Zealand dairies and beef exporters.



This section continues in the Subscriber's Area. Back to top
April 20 2015

Commentary by Eoin Treacy

Report from The Chart Seminar in Singapore

Eoin Treacy's view -

Last week’s event was another enjoyable visit to Singapore and was an apt time to ruminate on Lee Kwan Yew’s legacy of turning a tropical backwater into a first world private banking and high end manufacturing centre. Delegates came in from Argentina, Australia, Japan and of course Singapore which led to some interesting and varied discussions.

Singapore’s stock market is being led higher by the banking sector and shares a high degree of commonality with Taiwan and South Korea. The Index is somewhat overbought in the short-term and some consolidation of recent gains in looking likely. However a sustained move below the 200-day MA, currently near 3400, would be required to question medium-term scope for additional upside.

As one might imagine the main topic of conversation was on the outlook for the Asian region not least following China’s explosive breakout over the preceding three weeks.  Delegates were also interested in the outlook for the European region and we also looked at the S&P 500. We looked at the oil price and a number of related instruments. We also looked at gold prices and a number of miners, select Singapore shares as well as a wide range of international bank shares. We also had a wide ranging discussion on currencies. 



This section continues in the Subscriber's Area. Back to top
March 31 2015

Commentary by Eoin Treacy

Muhammadu Buhari Wins Nigerian Presidency in Power Shift

This article by Pauline Bax, Emele Onu and Yinka Ibukun for Bloomberg may be of interest to subscribers. Here is a section: 

Buhari, a 72-year-old former military ruler who heads the All Progressives Congress, won 52.4 percent of votes cast in all 36 states and the Federal Capital Territory in Africa’s biggest oil producer, according to tallies by the electoral authorities.

Jonathan received 43.7 percent in the March 28-29 election. He called Buhari to congratulate him, an opposition spokesman, Lai Mohammed, told reporters in the capital, Abuja.

“It’s a massive, massive democratic revolution for Nigeria,” Clement Nwankwo, executive director of the Policy and Legal Advocacy Center, which monitored the election, said by phone from Abuja. “It’s a boost to accountability, to the power of the people to bring a government to account through the ballots.”

Buhari, a northern Muslim, faces the tasks of ending a six- year-old war against the Islamist militant group Boko Haram that’s killed more than 13,000 people and restoring investor confidence in an economy that’s reeling from a 50 percent drop in the price of oil, its main export, since June.

“We are putting our feet on the first rung of the ladder of democracy,” Folarin Gbadebo-Smith, managing director of the Center for Public Policy Alternatives in Lagos, the commercial capital, said by phone. “We have been able to change a government that did not meet our expectations.”

 

Eoin Treacy's view -

The first true test of a nascent democracy is in the willingness of an incumbent to accept the will of the people, give up power and engage in an active opposition within parliament. The initial signs are positive that Nigeria can achieve this feat and as such it represents a significant step forward for the both the country and region’s standards of governance. Even more important is that Buhari has a record of integrity and a desire for reform which puts in good standing with other democratically elected reform minded leaders in countries like India and Indonesia.   



This section continues in the Subscriber's Area. Back to top
March 20 2015

Commentary by Eoin Treacy

U.Ks FTSE 100 Rides Past Record, Reaching 7,000 for First Time

This article by Inyoung Hwang and Roxana Zega for Bloomberg may be of interest to subscribers. Here is a section: 

“U.K. stocks have had a strong rise given the headwinds,” Richard Hunter, head of equities at Hargreaves Lansdown Plc in London, said by phone. “Mining, oil and bank stocks make up a big part of the index, and we all know the difficult time these three sectors have had. Despite that, the FTSE 100 has managed to make progress.”

It’s been a good week for the benchmark: Chancellor of the Exchequer George Osborne on Wednesday unveiled higher economic growth and lower deficit and unemployment forecasts along with help for the North Sea oil industry. The latter has helped energy stocks trim declines spurred by a rout in oil and metals prices. Banking shares have been hurt by a series of scandals ranging from manipulation of interest-rate benchmarks to tax- evasion schemes.

Even with the FTSE 100 at a record, the advance in British equities this year is about a third that of gains in European peers, which was boosted by additional stimulus from the region’s central bank.

Eoin Treacy's view -

Clicking through the constituents of the FTSE-350 sector Indices section of the Chart Library, we can see that the UK stock market’s rally is well supported, It is also worth noting that the banking, resources and oil & gas sectors are no longer acting as headwinds, have all found at least near-term support this week. 

We are in the final stages of testing for the new filter system and hope to re-launch it soon. Perusing the results of this high/low filter for the FTSE-350 we can see that the majority have been trending for some time which highlights just how much of a brake the above sectors have represented for the UK stock market. 

In the table, the columns represent performance over 1 month, 3 months, 6 months, 12 months, 3-years and 5-years. It will only show data for when the respective share has hit a new high. Therefore at the top of the table you will see all the columns are filled because prices have hit new five-year highs while further down the list a share may only have hit a new 3-month high. 

 



This section continues in the Subscriber's Area. Back to top
March 17 2015

Commentary by Eoin Treacy

Macau Gaming

Thanks to a subscriber for this report from UOB which may be of interest. Here is a section:

No signs of improvement. Since our previous adjustment of gaming revenue assumptions in early-January, Macau’s gaming market has shown further deterioration. In 2M15, gross gaming revenue (GGR) dropped 48.6% yoy to MOP43.3b, with VIP and mass-market GGR falling 40.3% yoy and 25.8% yoy respectively. As the trend suggests that 1Q15 GGR will fail to meet our previous MOP75.1b expectations, and various factors suggest fundamentals may deteriorate further before reaching the bottom, we further cut our expectations on future gaming revenue assumptions, with growth assumptions reduced to -21.2% (from -3.1%) for 2015 and +9.0% (from 12.7%) for 2016.

Besides declining revenue, we foresee that rising labour cost due to a labour shortage will put additional pressure on casino operators’ earnings. Several casino operators will be raising casino workers’ salaries by 5% in 2015. Hence, we lower 2015 and 2016 industry EBITDA assumptions by 27.0% and 32.4% respectively vs our previous estimates. We also lower our valuation multiples for casino operators because of the worsening market outlook

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

The anti-corruption campaign in mainland China has taken a toll on the fortunes of casinos, luxury goods and luxury drinks manufacturers. However while the leather goods and spirits companies are showing signs of renewed investor interest, Macau casinos are accelerating lower. 



This section continues in the Subscriber's Area. Back to top
March 09 2015

Commentary by Eoin Treacy

It is Deja Vu as Brazilian Impeached Ex-President Investigated

This article by Peter Millard for Bloomberg may be of interest to subscribers. Here is a section: 

“What’s really sad is that we’ve seen this movie before -- it’s on repeat,” said Paulo Bilyk, chief investment officer of Rio Bravo, a Sao Paulo-based fund with $10 billion under management.

Indeed, the unraveling of Collor’s presidency amid allegations of corruption and hyperinflation draws parallels to the current situation. Collor, the first elected president after Brazil’s dictatorship ended in 1985, was barred from holding public office for eight years after his impeachment on accusations he condoned an influence-peddling scheme run by his campaign treasurer. He was cleared of all accusations in 2014 by the Supreme Court, which cited insufficient evidence.

Collor won re-election for the state of Alagoas from a party allied with Rousseff shortly before his appearance at a campaign stop with the President. Collor’s political base is in Brazil’s northeast, one of the poorest regions of the country, where Rousseff’s Workers Party is also popular.

 

Eoin Treacy's view -

Governance is Everything. For a country like Brazil this is even more important now that commodities are no longer trending higher. Money swelling state coffers helps to paper over a lot of cracks. The problem is that when the flows of money reverses, in a lower commodity price environment, administrations often fail to realise that they need to improve governance in a meaningful way if investors are to be placated. Brazil under Dilma Rousseff has not demonstrated that it has grasped this fact.



This section continues in the Subscriber's Area. Back to top
February 20 2015

Commentary by Eoin Treacy

Widodo Moves Sink Cement Stocks With Banks Seen Next at Risk

This article by Harry Suhartono for Bloomberg may be of interest to subscribers. Here is a section: 

Investors are concerned that Jokowi’s administration will take a more “hands-on” approach to state-owned companies, said Joshua Tanja, head of research for Indonesian equities at UBS AG in Jakarta.

The government is considering lowering interest rates on government-subsidized loans to buyers of low-cost homes, Bisnis.com reported on Jan. 20. The online version of Indonesia’s largest business newspaper cited Basuki Hadimuljono, minister for housing and public works, for the proposal.

PT Bank Tabungan Negara, the state-owned lender that acts as an agent for government’s home-loan program, tumbled 8.2 percent the day after the report and is down 12 percent this year. Maryono, the president director of Bank Tabungan who goes by one name, didn’t answer calls to his mobile phone.

Investors should shift money into industries that have a lower chance of government intervention, including mobile-phone retailers and cigarette makers, John Rachmat, the head of research at PT Mandiri Sekuritas in Jakarta, wrote in a Jan. 19 research report.

 

Eoin Treacy's view -

The victory of Widodo in last year’s presidential election was watched closely in the hope that, as an outsider, he might hold the same promise of improving governance for Indonesia that Narendra Modi has for India. He has so far taken a proactive attitude to state owned enterprises and has attempted to lower the cost of infrastructure development by limiting the price of commodities such as cement. The limitations on ore exports have also remained in place. In late December he took advantage of lower oil prices to scrap gasoline subsidies and cap the payment on diesel. 



This section continues in the Subscriber's Area. Back to top
February 04 2015

Commentary by Eoin Treacy

Petrobras Top Management Resigns in Brazil Corruption Case

This article by Sabrina Valle, Denyse Godoy and Paula Sambo for Bloomberg may be of interest to subscribers. Here is a section: 

“With low oil prices and Petrobras’s financial difficulties, the incentives to lean more on international oil companies to help develop the pre-salt have grown substantially,” the Eurasia analysts wrote about the company’s offshore discoveries. “It is clear that any substitute to Graca is likely to be someone with industry credentials and capable of conducting a ‘house cleaning’ of the firm.”

The scandal has also engulfed Brazil’s largest construction companies, which may bring public works projects to a halt, and threatens the presidency of Dilma Rousseff, who served as Petrobras chairman during some of the time when the alleged graft was occurring.

Foster, a frequent guest at the presidential palace in Brasilia, had offered to resign “one, two, three times” after the company was forced to delay quarterly results because of the scandal, she told reporters on Dec. 17. Foster said then that she would stay in the job as long as the president trusted her.

Rousseff has been a personal friend since the two worked together at the Ministry of Mines and Energy in 2003.

Eoin Treacy's view -

An issue faced by many nationalised industries is that they become subject to the avarice of their politically appointed boards as well as rent seeking public officials. For Petrobras this was particularly poignant since the President of Brazil is a former executive. In the run up to the October election Petrobras rallied in anticipation of Dilma Rousseff losing. Unfortunately for shareholders she won and the additional decline in oil prices contributed to the share more than halving from what was already a depressed level. 



This section continues in the Subscriber's Area. Back to top
January 28 2015

Commentary by Eoin Treacy

Pizza Boxes in Play as Rock-Tenn Heralds More Mergers

This article by Brooke Sutherland for Bloomberg may be of interest to subscribers. Here is a section: 

There are other forces driving consolidation. An improving job market and the drop in oil prices are helping to stoke demand for consumer-related packaged products, said Panjabi of Baird. International Paper Wednesday reported fourth quarter sales that beat analysts’ estimates.
At the same time, materials costs are coming down, Panjabi said.

“The idea of increasing your exposure to that paradigm makes more sense,” he said. Companies are going to want to “capitalize on that dynamic” and merging with a peer will help reduce costs even further.

Packaging Corp. could be a potential takeover target or a merger partner, Anthony Pettinari, a New York-based analyst at Citigroup, wrote in a report on Tuesday. The company could also be an acquirer, according to Mark Wilde, a New York-based analyst at BMO. After buying Boise Inc. in 2013, it has the balance sheet flexibility to start looking at deals, he said.

 

Eoin Treacy's view -

As energy costs fall and consumers have more cash, the demand for and cost of manufacturing packaging should improve. The sector has been a solid outperformer over the last few years as consumer demand globally improved in line with the growth of the middle class but the fall in oil prices is an additional bullish catalyst. 



This section continues in the Subscriber's Area. Back to top
January 27 2015

Commentary by Eoin Treacy

Stronger Dollar Punishes U.S. Earnings From P&G to DuPont

This article by Cécile Daurat for Bloomberg may be of interest to subscribers. Here is a section: 

Other companies, like Honeywell International Inc., were able to anticipate the currency changes. Back in October, Honeywell CEO Dave Cote reversed his policy and started using currency hedges because he was -- rightly -- concerned the euro may sink further.

3M Co. today was another example of a global business weathering the dollar strength, partially with currency hedges. The St. Paul, Minnesota-based manufacturer beat fourth-quarter earnings estimates, countering the negative effects of foreign- exchange rates with stronger sales, especially in fast-growing markets.

P&G, which makes about two-thirds of annual sales outside of the U.S., said currency effects will continue to be a drag in the current fiscal year and reduce sales by 5 percent, leading to a decline of as much as 4 percent from a year earlier. Like Kimberly-Clark Corp. and other consumer companies, Cincinnati- based P&G was especially hurt by a slump in Venezuela, where falling oil prices have heightened the bolivar’s volatility.

Bristol-Myers, the New York-based maker of cancer treatments such as Yervoy for melanoma, gets about half its sales outside the U.S. The dollar’s strength weighs down the company as it pursues growth by focusing on a new class of cancer drugs.

 

Eoin Treacy's view -

The big fall in oil prices and the big rally in the Dollar continue to influence decisions in boardrooms. 3M and Honeywell were little changed today following their results not least because their currency hedging strategies paid off. Following a quarter where companies that hedged their exposure outperformed, we can anticipate that more companies will be hedging their currency exposure by the end of this quarter. 



This section continues in the Subscriber's Area. Back to top
January 26 2015

Commentary by Eoin Treacy

3 Myths That Block Progress For The Poor

The 2014 report from the Bill and Melinda Gates Foundation may be of interest to subscribers. Here is a section: 

You might think that such striking progress would be widely celebrated, and that people would rush to figure out what is working so well and do more of it. But they’re not, at least not in proportion to the progress. In fact, I’m struck by how few people think the world is improving, and by how many actually think the opposite—that it is getting worse.

I believe this is partly because many people are in the grip of several myths—mistaken ideas that defy the facts. The most damaging myths are that the poor will remain poor, that efforts to help them are wasted, and that saving lives will only make things worse.

I understand why people might hold these negative views. This is what they see in the news. Bad news happens in dramatic events that are easy for reporters to cover: Famine suddenly strikes a country, or a dictator takes over someplace. Good news—at least the kind of good news that I have in mind—happens in slow motion. Countries are getting richer, but it’s hard to capture that on video. Health is improving, but there’s no press conference for children who did not die of malaria.

The belief that the world is getting worse, that we can’t solve extreme poverty and disease, isn’t just mistaken. It is harmful. It can stall progress. It makes efforts to solve these problems seem pointless. It blinds us to the opportunity we have to create a world where almost everyone has a chance to prosper. 

If people think the best times are in the past, they can get pessimistic and long for a return to the good old days. If they think the best times are in the future, they see things differently. When science historian James Burke wrote about the Renaissance in The Day the Universe Changed, he pointed to one source for many of the advances that happened in that amazing period: the shift from the belief that everything was decaying and getting worse to the realization that people can create and discover and make things better. We need a similar shift today, if we’re going to take full advantage of the opportunity to improve life for everyone.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

Apart from its deep pockets the Gates Foundation sets itself apart by exuding a sense of optimism that the problems affecting large portions of the global population can be solved within our lifetimes. The rise of China and India has already lifted a billion people out of abject poverty and improving governance is likely to achieve a similar feat in the next decade for even more countries. 



This section continues in the Subscriber's Area. Back to top
January 23 2015

Commentary by Eoin Treacy

Review of the FTSE 350

Eoin Treacy's view -

The ECB’s massive QE program will put pressure on the BoE to delay any plans it may have had to raise short term interest rates. Along with its own easy monetary policy, the prospect of recovering demand on mainland Europe should be a positive for the UK’s economy and it may also be subject to additional capital flows since not all the money created by the ECB will stay inside the Eurozone. 

I thought it might be an opportune time to look at the FTSE 350 since its constituents may be among the beneficiaries of ECB largesse. The Index has surged over the last two weeks to retest its peak and a while some consolidation is possible in the current area a sustained move below 3500 would be required to question medium-term scope for additional upside. 

I clicked through the constituents of the FTSE 350 this morning and also created a section for the FTSE All Share REIT Index in the Chart Library. Here is a link to an Excel sheet of the FTSE350’s constituents ranked by sector then by market cap. 
Among Autonomies:

In the banking sector HSBC (Est P/E 10.65, DY 5.27%) has firmed in the region of 600p. It is now testing the 200-day MA and a sustained move below 600p would be required to question potential for additional upside.  

 



This section continues in the Subscriber's Area. Back to top
January 08 2015

Commentary by Eoin Treacy

A year of public investment driven macro economic vigour

Thanks to a subscriber for this interesting report from Deutsche Bank focusing on India. Here is a section: 

Improving economics and govt actions increase probability of ratings upgrade
We assign a high likelihood of a sovereign ratings upgrade for India as most macro indicators have exhibited improvements in past 2 years. A rating upgrade will likely entail multi-layered benefits for Indian economy and markets. Over the past decade we have witnessed 4 instances of rating upgrades by S&P and Moody’s and on an average Sensex has returned 9% in the following 6 months and 40% in the following 12 months of ratings upgrade. Boost to capital inflows and improved perception of India on the back of rating upgrade should help moderate volatility associated with US rate normalization and create some headroom for RBI to ease monetary stance.

India likely to remain one of the favored emerging markets
Expectations of normalization by the US Fed and a subdued commodity pricing environment will continue to drive multi-asset differentiation within Emerging markets. India's embrace of long pending, supply side reforms together with an investment driven macroeconomic stabilization will allow it to deepen its relative attractiveness in 2015. Among key EMs, India has demonstrated one of the best improvements on external front with CA deficit now in comfort zone at (2.1% in Sep’14 qtr. 4.7% in FY13), appreciable FX reserves accumulation and sharp uptick in capital inflows.

Government must ensure its economic agenda is not side tracked 
While the urgency in moving ahead on key ordinances is indicative of the commitment to reform, passing bills in parliament will be vital to ensure that reform is structural, enduring and getting institutionalized. Translation of many of the recent ordinances into law in the next session of parliament will be viewed as crucial determinants of the government’s execution prowess. Other risks: Faster- and steeper-than-anticipated Fed rate normalization and any systemic risk associated with steep decline in oil prices.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

There are few countries that benefit more from weak oil prices than India so the recent energy market moves represent something of a windfall for Narendra Modi’s government.  This might yet allow the RBI to cut interest rates but the broader question is over how bold the administration will be in its legislative agenda. A great deal of enthusiasm has already been priced into the market and it will be interesting to see how much is delivered upon this year. 

With a large young upwardly mobile population India represents a fertile market for global Autonomies, a number of which maintain listed subsidiaries on the Munbai exchange. Many of these trade on aggressive multiples not least because supply is reasonably thin. 

 



This section continues in the Subscriber's Area. Back to top
December 18 2014

Commentary by Eoin Treacy

Falling oil prices and the implications for asset quality

Thanks to a subscriber for this report from Deutsche Bank which may be of interest. Here is a section:

Our country bank analysts have studied the financing of the local energy production chain in 12 Asian markets and in this report evaluate the risks arising from sharply falling global oil prices. For the oil production countries, namely Australia, Malaysia and China, bank lending is primarily extended to the state-owned or globally established MNCs engaging in E&P (Exploration and Production), with some of them engaging in diversified energy businesses; for example, gas, that can help offset part of the losses from falling oil prices. In Australia, banks have set aside economic overlays (3-6% of the exposure) to buffer against potential risks from the worsening asset quality of the mining and energy sectors.

Impact for banks financing refinery businesses and overseas projects
While the refinery businesses of the major oil importing countries (India and Thailand) should benefit from falling global oil prices, the banks have less than 1% of loans pledged to the related industries, implying limited positive earnings impact. For Asian banks, such as Japanese banks, that have financed overseas projects, the borrowers are primarily strong companies with limited default risks.

Indian, Indonesian and Chinese banks historically the best performers
Since 2006, we identified four periods of global oil prices falling by an average of 46% within six months and we observed that global equity indices have been negatively affected, with MSCI Asia-ex JP financial index underperforming the S&P Index by 2%, but outperforming the global MSCI EM index by 4.7%. The best performers were India (+19%), Indonesia (+8%) and China (+4%), while HSBC (-14.5%), Standard Chartered (-21%) and Korean banks (-16%) were the worst. This order of performance is consistent with our preference among Asian financials based on our fundamental analysis.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

A number of Asian markets have been subject to some quite extreme volatility over the last couple of weeks as the impact of meaningfully low oil prices have shaken the status quo. 



This section continues in the Subscriber's Area. Back to top
November 26 2014

Commentary by Eoin Treacy

Shorting Chickens Becomes Hot Trade in Stock Market

This article by Megan Durisin and Shruti Date Singh for Bloomberg may be of interest to subscribers. Here is a section: 

With higher chicken prices and lower feed costs, the industry has been “operating under the most advantageous conditions possible,” Francesco Pellegrino, a New York-based analyst for Sidoti & Co LLC, who recommends buying Sanderson Farms shares, said in a telephone interview yesterday. He doesn’t cover Pilgrim’s Pride. Short interest has risen because investors are questioning how much longer “peak” conditions can persist, he said.

Whole chickens sold by farmers in Georgia, the biggest producing state, rose 9.4 percent this year to an all-time high of $1.14 a pound, which has held through much of November. A retail gauge of composite wholesale-chicken prices has climbed 24 percent this year to average 90.404 cents a pound in October, USDA data show.

Chicken production will climb 3 percent next year to an all-time high of 39.206 billion pounds, the USDA forecasts.

That’s at least 65 percent higher than estimated beef or pork output. A USDA index of chicken-feed costs was 24 percent lower in September than a year earlier as American farmers collect record corn and soybean crops.

Eoin Treacy's view -

While there is no futures contract for chicken we do have the price of boneless chicken breast in the Chart Library Library. Prices have been volatile but a progression of higher reaction lows is evident since 2008 and a sustained move below 180 would be required to question medium-term potential for continued higher to lateral ranging. 



This section continues in the Subscriber's Area. Back to top
November 24 2014

Commentary by Eoin Treacy

DBS, Bank of Singapore among top 10 private banks in Asia

This article from Channel News Asia dated last month may be of interest to subscribers. Here is a section: 

Private Banker International (PBI) said on Friday (Oct 17) that DBS Private Bank kept its ninth place in the ranking of wealth managers for the rich, with assets under management (AUM) of US$54 billion (S$68.7 billion) as at December 2013, up from US$46 billion the year before.
Bank of Singapore, the private banking arm of Oversea-Chinese Banking Corp (OCBC), stayed at number 10, with AUM of US$46 billion at the end of 2013, an increase from US$43 billion at end-2012. 

Looking ahead, Bank of Singapore said it expects to see further growth. Said its chief executive officer Mr Renato de Guzman: "We now have more than 300 relationship managers and we think there is more room for them to grow their asset base. 

“So organically we have within the organisation room to grow from existing resources that we have. Secondly, part of our strategy is to really work closely with OCBC, and they are very successful in areas or countries with a strong presence. The recent acquisition of Wing Hang Bank with OCBC is a big opportunity for Bank of Singapore."

 

Eoin Treacy's view -

At the Singapore venue for The Chart Seminar earlier this year, the majority of attendees were private bankers which was a departure from the event we held in Singapore during 2012. The growth of the sector in the city state reflects concerted long-term policy initiatives to grow the business and this is unlikely to change as the region’s major population centres increasingly seek private banking services. The opening up of China’s capital market and the increasing ability of capital to leave the country should be net benefits for the private banking sector. 



This section continues in the Subscriber's Area. Back to top
November 24 2014

Commentary by Eoin Treacy

Heineken Takes Beer Out of Man Cave With $300 Dispenser

This article by Matthew Boyle for Bloomberg may be of interest to subscribers. Here is a section: 

The Sub’s upscale design plays into the growing trend of more refined at-home drinking -- fancy cocktails, fine wine, craft beer -- which “communicates a certain status” among consumers, said Ben Voyer, a social psychologist at the ESCP Europe Business School. While mainstream beer volumes are falling, sales of premium-priced beers such as Heineken’s Affligem and the tequila-flavored Desperados are on the rise. In Italy, half of all Torps sold are Affligem, an ale started at a Belgian abbey founded in 1074.

Heineken fell 0.6 percent to 61.12 euros at 1:23 p.m. in Amsterdam. Even for the man who has everything, though, the Sub is “ridiculously” expensive, said Euromonitor analyst Spiros Malandrakis, who predicts it will fail unless Heineken licenses its technology to other brewers to widen the selection of brands. That strategy helped make Keurig Green Mountain Inc.’s coffee machines ubiquitous in American kitchens.

That won’t happen with the Sub, however, according to Nasard. “We’re not a service provider.” Instead, Heineken -- which has introduced a cheaper $235 plastic version of its machine -- plans to keep this Christmas gift in the family.

 

Eoin Treacy's view -

Most people who own a capsule coffee machine will testify that consumption and expenditure rise while tolerance for lower quality products such as instant decreases. That’s music to the ears of companies such as Nestle and it is inevitable that others seek to adopt a similar high profile business plan for their products. It remains open to question whether Heineken will succeed with its Torps but the innovation is admirable. 



This section continues in the Subscriber's Area. Back to top
November 21 2014

Commentary by Eoin Treacy

Email of the day on the outlook for 2015

Hi David & Eoin, I wanted to get FTM thoughts and opinion on where the best investment returns could be had over the next 12 months and what would be the key things to watch for? Thanks for an excellent service 

Eoin Treacy's view -

Thank you for your kind words and your question. This is a topic we cover almost daily in the written commentary and the audio but it is a good time to summarise our views. 

Let’s ruminate for a moment though on the timing of your question. Generally speaking, the last six weeks of the year is given over to thinking about the possibility of a Santa Claus rally and people don’t generally look at the outlook for the next year until the last week of December or the first week of January. It made headlines during the week that Goldman Sachs had released its prognostication for the coming year, which may have prompted your email. However I believe it is worth considering that the stock market is a discounting mechanism and as a bull market progresses we tend to want to discount cash-flows from increasingly further into the future. It is a measure of how strong the market has been over the last month that investors are already planning for next year. Five consecutive weeks to the upside suggest some consolidation is increasingly likely.

 



This section continues in the Subscriber's Area. Back to top
November 21 2014

Commentary by Eoin Treacy

Ibovespa, Real Surge on Speculation Levy to Be New Finance Chief

This article by Denyse Godoy and Filipe Pacheco for Bloomberg may be of interest to subscribers. Here is a section: 

Levy, who is head of Bradesco Asset Management Ltd., was treasury secretary from 2003 to 2006 under President Dilma Rousseff’s predecessor, Luiz Inacio Lula da Silva. He will replace Guido Mantega, Brazil’s longest-serving finance minister, Folha de S.Paulo newspaper reported in its online edition. The president’s press office said Rousseff won’t announce cabinet changes today.
“Levy is investors’ favorite name for the finance ministry because he is very close to the markets,” Jason Vieira, an economist at consulting firm MoneYou, said in a telephone interview from Sao Paulo.  “He is also known as a good manager for what he did at the Treasury.”

 

Eoin Treacy's view -

Dilma Rousseff acknowledged the failure of her last administration in her acceptance speech but the market will need to see evidence of real change before giving Brazil the benefit of the doubt once more. Appointing a finance minister who understands the market is a positive development. 



This section continues in the Subscriber's Area. Back to top
November 05 2014

Commentary by Eoin Treacy

Consumer shares

Eoin Treacy's view -

On October 10th I reviewed the constituents of the Autonomies section of the Chart Library. At the time approximately half were trading above or in the region of their 200-day MAs, while the remainder were in varying stages of trend deterioration. Since then the wider market has rebounded impressively, the Japanese market has been given a new injection of liquidity and the US Dollar has been quite firm. I clicked through the constituents once more this morning to identify those exhibiting relative strength. 



This section continues in the Subscriber's Area. Back to top
November 05 2014

Commentary by Eoin Treacy

African Presidents Push Burkina Faso Army to Hand Over Power

This article by Simon Gongo and Pauline Bax for Bloomberg may be of interest to subscribers. Here is a section: 

The presidents of Nigeria and Ghana are in Burkina Faso to press the army to cede power to civilians after its takeover last week.

Ghana’s John Dramani Mahama, chairman of the Economic Community of West African States, and Nigeria’s Goodluck Jonathan arrived in Ouagadougou, the capital, today to join mediation efforts. The African Union yesterday labeled the military’s takeover a coup, and reiterated a demand for army chiefs to step down within two weeks or face sanctions.

The army took charge of the country last week as President Blaise Compaore, who had held the office for 27 years, was ousted amid protests against his efforts to extend his rule. Lt. Col. Isaac Zida, the transitional leader, told religious chiefs yesterday that he will step down and have power to civilians.

Eoin Treacy's view -

Governance is a relative consideration rather than an absolute. There is no doubt that the Ebola crisis in West Africa has highlighted just how underdeveloped the region is in absolute terms but on a relative basis, the macroeconomic condition of an increasing number of countries is improving albeit from a low base. If Burkina Faso does in fact embrace a democratic model, it will be another step forward for the continent in terms of a desire to improve the standards of living for the majority. 

 



This section continues in the Subscriber's Area. Back to top
October 27 2014

Commentary by Eoin Treacy

Rousseff Losing Bond Investors as Economy Falters

This article by Paula Sambo and Filipe Pacheco for Bloomberg may be of interest to subscribers. Here is a section:

Quantitas Gestao de Recursos, a Porto Alegre-based investment boutique that manages 15 billion reais ($6.1 billion), estimated last week there is a 50 percent chance Brazil could be cut to junk in her second term.

“Unfortunately, this is very negative for Brazil,” Bianca Taylor, a Boston-based sovereign analyst and strategist at Loomis Sayles, which oversees $223 billion of assets, including Brazilian bonds, said in a telephone interview last night.

Taylor expects a “natural negative reaction” in bond markets this week. “She has not managed the country in a good way so far.”

Rousseff has boosted spending and stepped up government control of state-run companies, discouraging investment and helping sink the economy into stagflation. The country’s gross domestic product shrank in the first half of the year while annual inflation soared to 6.75 percent in September, above the top end of the government’s target range.

Bonds Fall
Brazil’s benchmark dollar bonds due in 2025 fell 0.44 cent to 100.87 cents on the dollar at 8:51 a.m. in New York while yields on local fixed-rated notes maturing in 2023 rose 0.57 percentage point to 12.61 percent. The Ibovespa benchmark equity index slumped toward a bear market, falling 4.9 percent to 49,408.11. The real posted the world’s biggest drop as it sank 2 percent to 2.5248 per dollar, a nine-year low.

Brazil’s dollar bonds returned 8.7 percent this year, trailing the average 10 percent advance for investment-grade developing nations, JPMorgan Chase & Co. indexes show. In Rousseff’s first three years in office, the notes posted an annual gain of 5.04 percent, lagging behind the 5.6 percent return for similarly rated sovereign peers.

 

Eoin Treacy's view -

In her victory speech Dilma Rousseff acknowledged her poor performance in stoking economic growth and said she wanted to do better the second time around. It is all well and good to commit to dialogue but reigniting growth in a declining commodity price environment is going to take courage and imagination which was not on show during her first term. The burden of funding social programs is likely to continue to be put on major state run enterprises such as Petrobras and might increase. 



This section continues in the Subscriber's Area. Back to top
October 23 2014

Commentary by Eoin Treacy

Rousseff to Be Ahead of Neves in Brazil Ibope Poll

This note by Matthew Malinowski for Bloomberg may be of interest to subscribers. Here it is in full:

 Incumbent Dilma Rousseff’s lead over Aecio Neves will be bigger than margin of error, Veja columnist Lauro Jardim reports today without saying where information was obtained.

It will be 1st time in the second round an Ibope poll shows Rousseff statistically ahead in valid votes: Veja

Ibope poll to be published at 6:00 p.m. local time on O Estado website: Veja

 

Eoin Treacy's view -

The heightened volatility seen on international currency markets over the last year highlights the fact that investors are no longer willing to assume all emerging markets will move in concert. The fact is that each needs to be addressed on its individual merits and perceptions of improving governance are more important than ever. 



This section continues in the Subscriber's Area. Back to top
October 21 2014

Commentary by Eoin Treacy

Mass. General in talks to build hospital in China

This article by Liz Kowalczyk for the Boston Globe may be of interest to subscribers. Here is a section: 

“China has a real serious problem in regard to availability of beds,’’ said Benjamin Shobert, managing director of Seattle-based Rubicon Strategy Group, which advises health care companies entering China. The shortage led the Chinese government two years ago to allow outsiders to invest in and provide expertise for the country’s health care system.

Since then, Mass. General, which is the largest hospital in New England, has developed a relationship with China. A Chinese medical tourism firm, Beijing Saint Lucia Consulting, refers patients to the hospital. The firm opened a Boston office last year to provide translators, chauffeurs, and other services for wealthy Chinese coming to Mass. General and other Boston hospitals for cancer treatment, orthopedic procedures, and other medical care.

“There is still a large gap between China and America when it comes to medical technology and service,’’ said Joseph Zhao, the company’s deputy general manager in China. With doctors in high demand there, “physician-patient communication only lasts 5 to 10 minutes,’’ he said.

 

Eoin Treacy's view -

Wealthy Chinese consumers have resources to buy just about any material possession imaginable but domestic healthcare is still developing relative to other countries. World class healthcare is as much an attribute of the upper middle class as luxury brands, property or other services and demand is increasing. Medical tourism continues to expand as demand for services represents growth in Asia while desire for lower cost is fuelling demand elsewhere. 



This section continues in the Subscriber's Area. Back to top
October 20 2014

Commentary by Eoin Treacy

Joko Widodo sworn in as Indonesia's president

This article from the Los Angeles Times may be of interest to subscribers. Here is a section: 

But Widodo’s reform efforts -- including plans to reduce a popular fuel subsidy that eats up around one-fifth of the national budget -- are likely to face opposition in a hostile parliament where the opposition, led by his election rival Subianto, holds 63% of seats. Subianto refused to accept his election defeat and has threatened to block Widodo’s agenda.

“While he has attracted plenty of plaudits for his clean style of government, he is untested at the national level and could struggle to push through critical reforms,” reported Capital Economic, a London research group.

Last month, Subianto won a vote to end Indonesia’s system of direct elections for local officials, which helped Widodo get his start in politics in Solo nine years ago. The change has raised concerns about the future of democracy in a country usually lauded as a successful example of transition from dictatorship.

Analysts say Widodo may have to cut deals with the opposition and possibly offer Cabinet positions to members of Subianto’s coalition. That could disappoint some supporters but also weaken resistance to his reforms, said professor Tim Lindsey, who directs the Center for Indonesian Law, Islam and Society at the University of Melbourne in Australia.

“Jokowi is a canny operator, and has shown the ability to broker deals while leading minority governments as mayor of Solo and as governor of Jakarta,” Lindsey said.

Widodo visited Subianto last week, their first meeting since the election, and mentioned him by name during his inauguration address. Subianto stood and gave Widodo a military salute -- a sign, according to experts, that he was offering his rival at least temporary support.

 

Eoin Treacy's view -

The election of a non-elitist to power in Indonesia is a major achievement and reflects the power of a democracy to deliver on improving standards of governance when needs must. Widodo will need skill and luck in order to push through his reform agenda and with an opposition led parliament this will not be easy. Indonesia became a net oil importer by 2004 yet the hefty oil subsidy it pays to keep the domestic price of fuel low is still intact. Any progress that can be made in reducing this burden will be seen as a win and would free up capital for more productive uses. 



This section continues in the Subscriber's Area. Back to top
October 13 2014

Commentary by Eoin Treacy

Brazilian Real Leads Global Currency Gains as Neves Ahead in Poll

This article by Filipe Pacheco for Bloomberg may be of interest to subscribers. Here is a section:

“The political debate tends to remain the main driver for currency trading,” Deives Ribeiro, a foreign-exchange manager at Fair Corretora de Cambio e Valores in Sao Paulo, said by phone. “Investors liked to see Neves ahead of Rousseff.”

Neves would have 52.4 percent of votes in the runoff, compared with 36.7 percent for Rousseff, according to a Sensus poll published on the website of IstoE magazine. The survey of
2,000 people Oct. 7-10 has a margin of error of plus or minus 2.2 percentage points. Ricardo Guedes, director of research firm Sensus, also conducts internal polls for the Neves campaign.

Eoin Treacy's view -

The ‘anyone but Rousseff’ camp appears to be gaining ground ahead of the October 26th run-off. With Marina Silva throwing her weight behind Aecio Neves the opposition has gained some important coherence. However, we can anticipate continued volatility until the final result is known. 



This section continues in the Subscriber's Area. Back to top
September 24 2014

Commentary by Eoin Treacy

Survey predicts health benefit cost increases will edge up in 2015

This article from Mercer may be of interest to subscribers. Here is a section: 

One strategy employers are using to soften the increase in health spending in 2015 is adding a low-cost, high-deductible health plan for the newly eligible employees – or for all employees.  Consumer-directed health plans (CDHPs) that are eligible for a health savings account cost, on average, 20% less than traditional health plans. Health reform is clearly accelerating that trend. While about half of large employers offer a CDHP today, nearly three-fourths (73%) say they will have a CDHP in place within three years.  And 20% say it will be the only choice available to employees (today, only 6% of large employers have moved to “full-replacement” CDHPs.)

“The move toward high-deductible consumer-directed plans is spurring other changes as well, such as more voluntary options,” said Ms. Watts. “While some employees are comfortable with a lower level of coverage, offering supplemental insurance alongside a high-deductible plan gives employees access to more protection if they want it.”

 

Eoin Treacy's view -

The Affordable Care Act is the gift that just keeps giving for insurance companies. The imposition of a 40% excise duty on so called “Cadillac plans” due to come into effect in 2018 is necessitating that employers revise the coverage they offer employees now. Untaxed health, dental and eye care benefits that were an attractive part of the total compensation package for a considerable number of white collar workers are now being rewritten in an attempt to avoid an even greater commitment on behalf of the employer.

The shake-up of the system, the fact that the value of health coverage offered by the employer now has to appear on the W2 (P60 in the UK) and the passing on of costs to the insured potentially means that people expecting a tax refund may not get one while others may get more than they anticipated. The evolution of the high deductible health plan (HDHP) means that upwards of a $1000 in deductibles will be passed onto workers before health coverage kicks in.  A couple of trips to the doctor or a routine test in the space of 12 months will quickly take that money out of one’s account and ensure it won’t get spent elsewhere. 



This section continues in the Subscriber's Area. Back to top