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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.

 



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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. 



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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. 



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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. 

 



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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. 



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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. 



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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. 



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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. 



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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. 



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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. 



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September 23 2014

Commentary by Eoin Treacy

Rousseff Has 42% Support in Brazil Runoff; Silva 41%

The results of the most recent Brazilian poll may be of interest to subscribers. Here is a section: 

President Dilma Rousseff and Marina Silva still stastistically tied, according to MDA poll published on CNT’s website.

In previous poll released Sept. 9, Marina Silva had 45.5% support in runoff vs 42.7% for Rousseff 
In 1st round, Rousseff would win 36% of votes vs 27.4% for Silva and 17.6% for Aecio Neves

 

Eoin Treacy's view -

Speculation in the Brazilian stock market has ebbed and flowed along with the prospects of incumbent Dilma Rousseff losing next month’s Presidential run-off. Rather than especially favouring Marina Silva investors appear to have adopted an “anyone but Rousseff” preference. In all likelihood the October 5th election will result in a run-off which will take place on October 25th.  



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September 19 2014

Commentary by Eoin Treacy

Robust demand and disciplined supply for metal casings

Thanks to a subscriber for this report from Deutsche Bank focusing on the metal casings sector for hand held devices. Here is a section:  

We hold an optimistic view on the metal casings industry. On the demand side, we are confident about its robust shipment momentum within the next three years due to (a) the design trend toward ultra-slim and lighter form-factor, and larger panel-screens on mobile devices (NBs, smartphones and tablets), (b) Apple’s preference for using metal casings (its adoption rate at 86%, Figure 19) for iPhone, iPad and Macbook products, and (c) the increasing adoption rate from other smartphone and tablet brand vendors. On the supply side, the disciplined procurement of CNC (Computer Numerical Control) machines by major casing suppliers in Asia (hence controlled supply increase) and the higher entry barriers in metal casings manufacturing and surface treatment solution can help ease the Street’s concerns about the industry’s oversupply risks.

Eoin Treacy's view -

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

It is easy to become desensitised to photos of long lines of people sleeping outside Apple stores in order to be among the first to own the next new product. However these people represent the loyal customer base that is the envy of every other consumer electronics company. News last week that privately held, discount smart phone manufacturer Xiaomi would be moving to metal cases exemplifies the trend of Apple imitators, not least in the build quality end users have come to expect.



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September 15 2014

Commentary by Eoin Treacy

BlackRock Betting on Silva Win in Brazil Is Bullish on Petrobras

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

Brazil votes next month on whether to reinstate incumbent President Dilma Rousseff or elect Marina Silva. The two are running in a statistical tie, with a Vox Populi poll published last week showing Silva would get 42 percent of votes in a runoff, compared with 41 percent for Rousseff.

“We’re overweight because we’re looking and we’re continuing to look for change,” Landers said in a Sept. 12 interview at BlackRock’s New York office. “We have good reasons to believe that the election will go towards Marina.”

Landers said Silva is signaling that she will allow the private sector to be “in charge of its own destiny,” instead of trying to control every aspect of the economy, and that she will bring inflation down. Rousseff has been using Petrobras and other state companies as fiscal and monetary policy tools, driving their value down, Landers said.

As part of Rousseff’s effort to contain inflation, she limited Petrobras’s ability to increase fuel prices.

If Rousseff wins in October, Petrobras will return to the nine-year low it hit in March, Landers said, and BlackRock would reduce its exposure to Brazil. “We would significantly have to rethink our portfolio,” Landers said. The Latin America fund shrank from $4.5 billion in December on flows.

Petrobras is the second-largest holding in Brazil after Itau Unibanco Holding SA in BlackRock’s Latin America fund. Earlier this year, various BlackRock funds bought 500,600 shares of Petrobras, as the Rio de Janeiro-based company is known, according to data compiled by Bloomberg.

Eoin Treacy's view -

The Brazilian Bovespa Index pulled back sharply from early this month in the aftermath of polls that showed Rousseff with a wider lead than many had expected. This year has seen a number of heavily contested elections which have seen pro-reform candidates assume power. If Brazil votes for Silva it will probably be seen as another green light for foreign investors to return to Brazil after a particularly difficult period. 



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September 09 2014

Commentary by Eoin Treacy

Email of the day on uranium mining investment vehicles

Your comment on the Uranium price is of interest to me. Prior to Fukishima , Geiger Counter was very much in vogue. Then came the collapse. I wondered what the view was now concerning the above and perhaps suggest other companies listed in London that have positive chart patterns .    

Eoin Treacy's view -

Thank you for this question which others may have an interest in. Geiger Counter generally runs a concentrated portfolio of high potential explorers and developers although its current holdings are peppered by some larger uranium names.  

I highlighted it as a potentially interesting fund offering exposure to the uranium market on August 22nd

 



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September 05 2014

Commentary by Eoin Treacy

A Chinese Internet Giant Starts to Dream

This article from the MIT Technology Review focusing on Baidu may be of interest to subscribers. Here is a section: 

Ng, who calls deep learning a “superpower,” will build a new generation of such systems at Baidu. Services that may result remain in the brainstorming stage, but he will hint at what they may be. He dreams of a truly intelligent personal digital assistant that puts Apple’s Siri to shame, for example. Looking further ahead, the technology could transform robotics, a pet subject for Ng—his engagement photos were taken in a robotics lab—and make autonomous cars and unmanned aerial vehicles much more capable. “We’re going to do some cool things here,” he says with a grin.

They’ll have to if they are to compete: Google, Facebook, Microsoft, and others have been hiring lots of deep-­learning experts for their labs, sometimes even from each other. And Baidu still has a lot to prove. Fairly or not, it has the reputation many Chinese companies do for copying the products and business models of U.S. Internet leaders. It’s a process cynics dub C2C—“copy to China.” Baidu has seemingly tried to emulate Google in countless ways over the years, from its spare search homepage to a head-mounted computer, Baidu Eye, that looks a lot like Google Glass. Baidu has even begun working on self-driving cars. With its new star hire, it appears to be following Google’s lead once again.

Ng insists that the C2C stereotype is no longer accurate, particularly for his new employer. “I used to work for the USA’s Baidu,” he jokes. Then he picks up his phone and says in English, “Please call a taxi for me.” A moment later, Baidu’s translation app utters the same phrase in Mandarin Chinese and shows the equivalent ideograms on the screen. It’s slick—but is it better than Google’s translation app, which appears to do the same thing? That’s not clear. It’s Ng’s job to develop cutting-edge technologies that will leave no doubt who is ahead.

Eoin Treacy's view -

As a country develops, the logical path both in the governance and commercial fields is to look at what worked elsewhere and employ it at home. The more successful companies eventually branch out to create their own novel solutions to problems and compete on the international stage. China’s companies are well capitalised and have a government willing do take major steps to promote their wellbeing. As high population countries in Asia, Latin America and Africa develop and their middle classes increase, the opportunity is ripe for internet companies to benefit. Chinese companies are well placed to compete in this environment. 



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August 29 2014

Commentary by Eoin Treacy

Brazil Slips Into Recession for First Time in Over 5 Years

This article by Matthew Malinowski and Raymond Colitt for Bloomberg may be of interest to subscribers. Here is a section: 

Brazil’s economy slipped into recession for the first time in more than five years as investments contracted on lower confidence before the October presidential election.

Gross domestic product shrank by 0.6 percent in the April- June period from the previous three months, after contracting a revised 0.2 percent in the first quarter, the national statistics agency said today in Rio de Janeiro. The contraction in the second quarter was bigger than the median estimate of 42 economists surveyed by Bloomberg, who expected a 0.4 percent drop.

President Dilma Rousseff has attempted to revive growth with tax cuts, billions of dollars in credit and higher social spending. With inflation hovering around the upper limit of the target range, consumer and business confidence eroded in the run-up to the first round vote on Oct. 5. It’s the first time the economy contracted for two consecutive quarters since the aftermath of the global financial crisis in 2008.

“This is the last thing that Dilma would have wanted, today’s data is the worst-case outcome for her,” Neil Shearing, chief emerging markets economist at Capital Economics Ltd, said by phone from London. “This is clearly going to put pressure on the central bank to loosen policy in order to support growth.”

Eoin Treacy's view -

In the bad news is good news department, the underperformance of the Brazilian economy increases the likelihood that Rousseff will not win the October election. Investors are betting that a victory by a pro-business candidate will boost stock market returns because of expected regulatory changes, not least a removal of the oil price subsidy. 



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August 28 2014

Commentary by Eoin Treacy

BOK Cut Room Seen in Inflation-Linked Debt Slump

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

So-called linkers due June 2023 lost 1.8 percent this month, data compiled by Bloomberg show. Notes maturing in 2021 indicate inflation of 1.56 percent over their lifetime, less than the Bank of Korea’s target of 2.5 percent to 3.5 percent through 2015. Governor Lee Ju Yeol lowered the benchmark rate to 2.25 percent from 2.5 percent on Aug. 14 and said price pressures are “not high.”

The first reduction in borrowing costs since May 2013 came after the BOK lowered its living cost estimates and Finance Minister Choi Kyung Hwan unveiled an 11.7 trillion won ($11.5 billion) spending plan to boost the slowest growth in more than a year. While most analysts predict Lee will keep interest rates unchanged, Samsung Asset Management Co. and Eastspring Asset Management Co. see room for a further cut.

“Another rate cut within the year is possible as one isn’t enough to support the government’s growth push,” Jack Kim, who helps manage 700 billion won of fixed-income assets for Eastspring in Seoul, including Korean linkers, said in an Aug.26 phone interview. “Low inflation should make it feasible.”

 

Eoin Treacy's view -

Falling interest rates, low inflation, a government flush with cash and keen to promote growth results in South Korea being an interesting prospect right now. The strength of the Won throughout the last year, especially during a time when currency market volatility has been an issue for a number of neighbouring countries is an additional positive consideration from the perspective of foreign investors. 

South Korea’s stable of highly successful world class companies is a logical place to start one’s investigation of the domestic stock market but neither the major electronics companies, at 22% of the Index, nor the Korean automakers are responsible for the recent return to outperformance of the Kospi. 

 



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August 20 2014

Commentary by Eoin Treacy

Indonesian Nationalism

This article by Neil Chatterjee for Bloomberg casts a cautious tone on political machinations within Indonesia. Here is a section: 

Indonesia’s leaders want to wean the country off of commodities and push investment in value-added manufacturing and services to emulate the success of countries like South Korea and create a more even distribution of wealth. With a population hungry for jobs, there is fertile ground for the elite to paint the issue in nationalist terms and blame foreigners to win votes and serve its own interests. After all, countries from Australia to Zimbabwe are pursuing similar drives to earn more from their resources. Critics including the World Bank say such policies often backfire, and that driving away investors could cost Indonesia more than $6.5 billion in lost taxes and royalties over the next three years. That could exacerbate an economic slowdown and cripple efforts to build roads, schools, hospitals and other infrastructure.

Eoin Treacy's view -

It will still be a while before Joko Widodo’s victory is confirmed by the Supreme court and his administration takes over. Indonesia ranks towards the top of global corruption rankings so anything a new government can do to reduce graft and streamline planning will help improve perceptions that the country of 300 million can begin to reach its productive capacity.

The last few days of the previous administration’s rule saw an easing of export restrictions on ores but it remains to be seen what Widodo’s attitude to the ban is. In attempting to ensure greater benefit from its natural resources, Indonesia is attempting to mirror China’s development where a focus on infrastructure development in its early stages paid off. 



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July 31 2014

Commentary by Eoin Treacy

Adidas Drops Most in 17 Yrs, Berenberg Sees Credibility On Line

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

Management communication, credibility “appear on the line” after profit warning, Berenberg says in note.

In golf, mkt “over-bloated” with inventory, U.S. chains such as Dicks have to right size existing goods, cut future orders

TaylorMade-adidas Golf restructuring may cost ~EU25m-EU30m ex loss of sales, profit anticipated in 2H14

In Russia has done an about-face, will now accelerate store closings, big effect is associated loss of 2H sales, profit, as E. Europe ~14% sales, 20% Ebit, Russia is >90% of that region

Scope of downgrade hard to quantify

Baader Bank says share price reaction “adequate,” sees potential downside revision for mkt consensus of 20%-25%

Profit warning expected, but sharper than seen.

Eoin Treacy's view -

Adidas’ expansion into Eastern Europe has not been as successful as planned and the closing of stores in Russia reflects this. Tighter sanctions imposed on Russia by Europe may have been the final catalyst for this decision. By contrast the reorganisation of TaylorMade is a significant but much smaller issue.  

Adidas’ share price has been deteriorating since late last year and it began to encounter resistance in the region of the 200-day MA from March. Today’s action represents an acceleration of the downtrend but there is no evidence yet that it is over. Some scope for a reversionary rally exists but a potentially lengthy period of support building will be required before investors are likely to support significantly higher levels. 



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July 31 2014

Commentary by Eoin Treacy

Londoners Cashing in Flee to Suburbs as Rally Wanes: Mortgages

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

 

The slowdown in price gains and the prospect of realizing profit tied up in London homes could tempt wealthy foreigners to head elsewhere, economists say. Those who bought homes in the priciest districts of town in dollars, rubles, rupees or riyals during 2009 would double their money if they sold today, Hamptons’ Morris said.

“With the prospect of increasing interest rates, and resultant strengthening of the pounds, the temptation for overseas investors to cash in is getting bigger,” Morris said.

Chancellor of the Exchequer George Osborne is adding a capital-gains tax next year on homes sold by people living abroad after raising a transaction tax to 7 percent from 5 percent for properties priced at more than 2 million pounds in 2012.

Eoin Treacy's view -

London property was a safe haven in the aftermath of the financial crisis not least because of low supply and the swift devaluation of the Pound. With transaction taxes set to increase and the prospect of Russian investment being curtailed, the market has lost a potent source of demand which will likely sap potential for additional upside. 



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July 30 2014

Commentary by Eoin Treacy

Tapping into growth

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

Beer takes share from a readily addressable market in the form of cheaper,  often illicit and non-commercial alcohol. The level of local alcohol in a market  is strongly correlated to national income as per Figure 9.

This readily available market accounts for over 50% to 90% of alcohol consumption in Africa, with growing markets like Nigeria, Democratic Republic of Congo and Ethiopia particularly attractive. Other emerging markets have lower, but nevertheless interesting figures which range from 15% to 40%. Markets like Latin American Ecuador and Peru and Asian markets such as Myanmar and Cambodia looking interesting to the brewers. 

Beer is a luxury 
The barrier to conversion from illicit alcohol to beer is the affordability of beer.  Per capita consumption in a market is relation to the amount of time a consumer has to work to afford a beer. As seen in Figure 11, the first inflection point for growth acceleration is around 120 minutes of work to afford a beer.

A second inflection can be found at 30 minutes worked for a beer. Not only does beer consumption accelerate to the levels seen in developed markets, consumers also move up in the portfolio towards more premium brands. 

There are market dependent limits to per capita growth 
There is a limit to how much alcohol and beer one can drink. For beer, the per capita average of 10 liters of pure alcohol translates to 200 liters which approximates consumption in core beer markets such as Germany and Czech. 

As markets mature, our analysis indicates a range of 70-90 liters per capita being the developed market norm over time. For most emerging markets with favorable population and illicit alcohol profiles, this is a growth destination; for developed markets this may translate into more declines.

 

Eoin Treacy's view -

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

The last few paragraphs above highlight just how important international expansion is for larger brewers. The profile of consumption in emerging middleclass economies represents where they have the best potential to grow their businesses. The pace of M&A activity within the sector highlights the fact that international expansion and establishing  brand loyalty remains a priority. 



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July 28 2014

Commentary by Eoin Treacy

Zillow to Acquire Trulia for $3.5 Billion in All-Stock Deal

This article by Jing Cao and Pui-Wing Tam for Bloomberg may be of interest to subscribers. Here is a section: 

The deal positions a unified Zillow and Trulia to capture a larger share of digital real estate ads as more people shift house hunting onto the Web and property agents deploy more marketing dollars onto the Internet. While there are other real estate websites such as Move Inc. and Redfin Corp. that are growing, Zillow and Trulia are the top two most-visited property sites in the U.S. tracked by ComScore Inc.

“The opportunity here is very large -- both companies are growing extremely fast,” said Ron Josey, an analyst at JMP Securities who rates Zillow the equivalent of a buy. “They should be able to benefit from some sort of brand awareness and the network effect just grows with this deal alone.” 

Eoin Treacy's view -

The housing recovery is well established and while some areas of California appear to be fully valued, the prospects of another crash appear remote. Real estate agents compete for access to the consumer base and online databases represent a great way of marketing so that personal interaction can be reserved for the most serious prospects. As a result, online real estate search engines represent potent marketing venues not least via mobile apps. 



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July 25 2014

Commentary by Eoin Treacy

China digital transformation: The Impact of the Internet on productivity and growth

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

China has posted high rates of labor productivity growth in recent years, but its progress began from a very low base. As a result, its labor productivity remains well below the levels in advanced economies (Exhibit 3). China created $15,500 of GDP per worker in 2013, significantly lower than levels in the United States ($107,200), Japan ($76,700), and Germany ($67,300). A closer look at the sector level bears this out: US labor productivity in the ICT and manufacturing sectors, for example, was 12 and ten times higher than China’s average labor productivity in those sectors, respectively, in 2013.

China faces a growing imperative to continue making strong gains in productivity. The rapid economic growth of recent decades was fueled by an expanding labor force and heavy capital investment, but this model is coming under pressure, particularly as the population ages. In fact, China’s labor force is projected to begin shrinking by 2015. As the dependency ratio doubles over the next two decades, the savings rate is also likely to decline as older Chinese draw down their savings. To avoid a slowdown and continue to improve living standards, China will have to make its existing labor and capital stock more efficient—and wider technology adoption will be central to this effort.

The rapid growth of China’s Internet economy is not yet reflected in its labor productivity performance. From 2010 to 2013, China’s labor productivity increased by 26 percent, while the contribution of Internet-related output to GDP increased by 35 to 60 percent (depending on whether C2C e-commerce is included).

However, China appears poised to capture large gains as its companies step up their adoption of Internet technologies. According to McKinsey’s latest survey of Chinese CIOs, the typical Chinese company spends 2 percent of revenue on IT, far below the 4 percent international average. These same respondents predict their IT spending will increase to 3 percent of revenue by 2015—and while that still leaves a large gap, it indicates clear momentum.26 As Chinese companies digitize their operations on a wider scale, they will gain the ability to streamline operations, open new sales channels, accelerate the R&D process, and become leaner.

The Internet is likely to usher in disruptive change, but it is also a catalyst for faster productivity growth. We project that the new applications described in this report could contribute 7 to 22 percent of China’s overall labor productivity improvement by 2025. Capturing this potential will be critical for China’s future competitiveness, particularly as the country’s labor costs increase and its demographic dividend diminishes. 

 

Eoin Treacy's view -

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

China has succeeded in transforming its economy by leveraging its low labour costs and enormous population. However as the population ages and wages increase, delivering productivity gains is essential if the country is to succeed in attaining its long-term development goals. 

A large number of countries have succeeded in moving from low income to middle income economies but the number that have persisted with their goal of moving into the high income bracket is considerably smaller. Continued zeal for the policy objectives that deliver productivity growth will be worth monitoring as a result. China’s digital economy represents a promising development and suggests that it will succeed in continuing to move up the ranks of GDP per capita. 

 



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July 25 2014

Commentary by Eoin Treacy

South Africa Remains Committed to Debt Sustainability

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

Rising burden of debt reinforces importance of sustaining fiscal policy, Finance Minister Nhlanhla Nene tells lawmakers in Cape Town during debate on national budget.

Nene also says:

“Rising interest rates have increased the cost of servicing our debt, commodity prices have declined and the depreciation has pushed up inflation”

Fiscal space built up in the early 2000s has diminished

Govt has taken measures to reduce consumption spending

 

Eoin Treacy's view -

The weakness of the South African Rand has been a tailwind for the stock market in local currency terms but does little to stimulate foreign investor interest in the country. Therefore it is worth monitoring the Rand for signs it may be stabilising as a clue to when foreign investors will revisit the South African market. 

The US Dollar accelerated to a medium-term peak near ZAR11.5 versus the Rand in January and encountered resistance near ZAR11 from June. It is now testing the region of the 200-day MA and a failure at this level would further challenge the consistency of the three-year uptrend. 

 



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July 24 2014

Commentary by Eoin Treacy

Ethiopia Becomes China to China as Shoe Workers Chant in Mandarin

This article by Kevin Hamlin, Ilya Gridneff and William Davison for Bloomberg may be of interest to subscribers. Here is a section: 

Shaping up a handful of employees is one small part of Zhang’s quest to profit from Huajian’s factory wages of about $40 a month -– less than 10 percent the level in China.

“Ethiopia is exactly like China 30 years ago,” said Zhang, 55, who quit the military in 1982 to make shoes from his home in Jiangxi province with three sewing machines and now supplies such brands as Nine West and Guess?. “The poor transportation infrastructure, lots of jobless people.”

Almost three years after Zhang began his Ethiopian adventure at the invitation of the late Prime Minister Meles Zenawi, he says he’s unhappy with profits at the Dongguan Huajian Shoes Industry Co. unit, frustrated by “widespread inefficiency” in the local bureaucracy and struggling to raise factory productivity from a level he says is about a third of China’s.

And

Cost inflation in countries including China has prompted Hennes & Mauritz AB, Europe’s second-biggest clothing retailer, to work with three suppliers in Ethiopia. The nation has “great potential” for production, H&M head of sustainability Helma Helmersson said in an April interview.

China’s average manufacturing wage is 3,469 yuan ($560) per month. Pay at the Huajian factory ranges from the basic after- tax minimum of $30 a month to about twice that for supervisors.
By contrast, average manufacturing wages in South Africa, Africa’s biggest manufacturer, are about $1,200.

The duty-free and quota-free access that Sub-Saharan Africa enjoys for the U.S. and EU markets gives additional savings thanks to the African Growth and Opportunity Act for the U.S. and the EU’s Everything But Arms accord for the poorest countries. Import tariffs on shoes made in China range from 6 percent to as much as 36 percent, Zhang said.

 

Eoin Treacy's view -

Textiles is one of the most price sensitive industries and therefore is the first to migrate to cheaper locales when wage pressures appear. Therefore watching where textile companies choose to situate their factories offers a good indication of where rapid economic growth is likely to manifest itself next. As governance improves in much of Africa, the challenge of mobilising increasingly large populations to realise their productive capacity is a daunting one. However when starting from such low levels, administrations can follow a path well-paved by Asian countries over the last half century. Little wonder then that Chinese manufacturers spot parallels between China and Ethiopia.



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July 23 2014

Commentary by Eoin Treacy

4 Reasons China Removed Oil Rig HYSY-981 Sooner Than Planned

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

The discussions between Yang and his Vietnamese counterpart, Deputy Prime Minister and Minister of Foreign Affairs Pham Binh Minh, were not strictly convened to discuss South China Sea issues; but it is clear the oil rig crisis dominated talks. In private remarks Yang strongly advised Vietnam not to take legal action against China in the interest of repairing bilateral relations.

Yang also held meetings with Prime Minister Nguyen Tan Dung and party Secretary General Nguyen Phu Trong. The latter meeting was especially significant because it led to an informal understanding to find a mutually acceptable way out of the current impasse. In order to clear the way for bilateral discussions both sides agreed to conduct follow up discussions by party officials responsible for external affairs.

While Chinese and Vietnamese party foreign affairs specialists began sounding each other out, Vietnamese party leaders agreed to convene a meeting of the Central Committee specifically to focus on the South China Sea dispute and the proposal to initiate legal action against China. Given the ground swell of anti-China opinion in the party and society at large “to break out of China’s orbit,” it appeared likely that the Central Committee would not only approve legal action against China but also approve steps to align more closely with the United States. Foreign Minister Minh’s trip was approved and he is scheduled to visit Washington in September.

It was in this context that China decided to announce the early withdrawal of HYSY-981 from contested waters. According to retired General Nguyen Trong Vinh (xuandienhannom blog, July 16), China deliberately withdrew the oilrig to influence the outcome of the forthcoming Vietnamese party plenum. The coincidence of Typhoon Rammasun provided the pretext. If Chinese officials were concerned about the safety of HYSY-981 they should have left it in place rather than tow it towards Hainan Island where Typhoon Rammasun was headed.

 

Eoin Treacy's view -

The ratcheting down of tensions between China and Vietnam, at least temporarily, is a welcome development suggesting China is interested in keeping Vietnam within its sphere of influence. How the Chinese will act once Vietnam’s 9th plenum has ended remains open to question. 

 

 



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July 23 2014

Commentary by Eoin Treacy

Saudi Stock Opening Shut to Some as Hot Money Unwanted

This article by Zahra Hankir and Sarmad Khan for Bloomberg may be of interest to subscribers. Here is a section: 

Saudi Arabia is keeping as much as $40 billion of foreign investor capital waiting as it decides which institutions can participate in the Arab world’s biggest stock exchange.
     
The regulator will publish rules next month allowing participation for the first time by qualified foreign financial institutions starting in the first half of 2015, the Capital Market Authority said on its website yesterday. The announcement sent the benchmark Tadawul All Share Index to its highest level since May 2008 yesterday, and the strongest level since February
2008 today.

The world’s biggest crude exporter is opening one of the most restricted major stock exchanges as King Abdullah pushes to diversify the economy from oil and create new jobs. Entry to MSCI Inc.’s benchmark emerging-markets index could mean $40 billion of inflows to Saudi stocks, said Rami Sidani, the head of frontier markets investing at Schroder Investment Management in Dubai. Buying shares may be restricted initially to long-term institutional investors, according to Shuaa Asset Management.

“They have been very clear about what they are looking for, which is very large institutional investors, sticky money with long investment horizons,” Amer Khan, a senior executive at Shuaa in Dubai, which oversees more than $300 million in assets, said by telephone yesterday. “They have seen what happened during the financial crisis and they want to limit hot money.”

Eoin Treacy's view -

We began to highlight the fact that a number of Middle Eastern stock markets had catch up potential in 2011. As valuations increase for large cap markets such as the USA, investors naturally begin to look for markets with lower valuations and those that have not experienced substantial gains. This year the resources sector is where the Saudi Arabian Index was in 2011. 



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July 18 2014

Commentary by Eoin Treacy

The next industrial revolution: Moving from B-R-I-C-K-S to B-I-T-S

Thanks to a subscriber for this report from Goldman Sachs exploring the industrial applications of the Internet of Things (IoT). Here is a section: 

While IoT spans a variety of industrial sectors, the focus of this report is on Home Automation. Previous reports in this series addressed the applications of IoT to CommTech, Semiconductors and Software. In this report, we address the impact of the IoT on the industrials space, with a deeper dive into Home Automation within the Building Automation opportunity below. We expect a series of follow-up reports touching the following topics.

Building Automation focuses on improving energy efficiency and occupant comfort/utility within the home or commercial building. Key advantages include improved security, remote monitoring of devices, and energy management.

Manufacturing applications of IoT could help facilities to reduce downtime through predictive maintenance, have better visibility into inventory and energy management, and improve operational efficiencies overall.

Resources could benefit from real-time equipment monitoring, energy efficiency (smart meters), and fuel reduction (O&G).

 

Eoin Treacy's view -

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

The frivolity of much of the social media space has led some to believe that future productivity gains will be limited. However, the increasing application of new technologies to the industrial sector almost certainly insures that this assumption will prove false. Rapid prototyping, embedded sensors, processors and transmitters are driving efficiencies that are transforming the industrial sector. This is important because productivity growth is a necessary component in the evolution of a secular bull market. It is for this reason that veteran subscribers will be familiar with our continued emphasis, particularly in the Friday audio, that we are in a technological golden age more commonly referred to as the Third Industrial Revolution. 



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July 09 2014

Commentary by Eoin Treacy

Widodo Euphoria Lost on Top Forecaster Before Election

This article by Kyoungwha Kim, Liau Y-Sing and Ye Xie for Bloomberg may be of interest to subscribers. Here is a section: 

Both leading presidential candidates, Jakarta Governor Joko Widodo, known as Jokowi, and Suharto-era General Prabowo Subianto, pledge to tackle corruption, improve infrastructure and boost economic growth in the world’s most populous Muslim nation. Indonesia’s benchmark stock index rose to a seven-week high and the rupiah strengthened yesterday as a new poll showed Jokowi widening his lead over Prabowo and speculation grew that voters outside Indonesia support him.

The Lingkaran Survei Indonesia poll released yesterday showed Jokowi, 53, leading by 3.6 percentage points, compared with a 0.5 percentage-point advantage in a similar poll at the end of June. A Roy Morgan poll last week showed the race was too close to call.

A Prabowo victory might “act as a dampener for business sentiment given his penchant for following populist, protectionist and debt-fueled growth policies,” said Anne, whose bank rose from third place in the first-quarter rankings.

 

Eoin Treacy's view -

By this time just about everyone understands how transformative a positive change in government can be; considering the effect Narendra Modi’s landslide victory has had in India. This has fuelled optimism for the candidacy of Joko Widodo who voters hope can deliver a similarly transformative effect on the Indonesian economy. He does not have the same resume as Narendra Modi but there is little doubt that Indonesia’s financial markets would benefit from a market friendly administration. 
 

 



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May 09 2014

Commentary by Eoin Treacy

Sprouts Farmers Market Profit Soars; 2014 Outlook Raised

This article by Tess Stynes for the Wall Street Journal may be of interest to subscribers. Here ii is in full:

Sprouts Farmers Market Inc. (SFM) said its first-quarter profit surged 86% as the specialty grocer's revenue beat expectations.

Shares rose 6.1% to $29.06 in recent after-hours trading as adjusted earnings also beat estimates and it raised its 2014 guidance.

For the year, Sprouts raised its per-share adjusted earnings estimate by a nickel and now expects 63 cents to 65 cents. The grocer also increased its projection for net sales growth by two percentage points and now expects an increase of between 18% and 20%. The company also boosted its same-store-growth estimate by 1.5 percentage point to between 8.5% and 9.5%

The competition in the organic and natural foods space has intensified, as established supermarket chains beef up their higher-end offerings and other niche players embark on expansion plans.

Phoenix-based Sprouts reported a profit of $33.7 million, or 22 cents a share, up from $15.6 million, or 14 cents a share, a year earlier. Excluding secondary offering expenses and other items, adjusted earnings rose to 23 cents from 14 cents. Analysts polled by Thomson Reuters expected per-share profit of 20 cents.

Revenue increased 26% to $722.6 million, topping the company's forecast for $720 million. Same-store sales increased 13%.

Rival Whole Foods Market Inc. (WFM) reported late Tuesday that fiscal second-quarter earnings were flat from a year ago, at $142 million, albeit revenue was up nearly 10% at $3.32 billion. The company also trimmed its annual sales and profit forecasts.

 

Eoin Treacy's view -

A lot of the steam has been squeezed out of recent IPOs regardless of sector. A number of new entries face challenges associated with growing quickly. They often absorb some of their smaller competitors in the race to seek a stock market listing. This means they are left with a number of units that do not fit cohesively with the whole. This is as true of 3D printing shares as it is of internet security and while the challenge is not as great for supermarkets, creating and inseminating a company culture remains a challenge. 



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May 08 2014

Commentary by Eoin Treacy

Nestle Challenge Grows After $5 Billion Mondelez Merger

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

For Nestle SA, life at the top of the $81 billion coffee market just got more difficult. The world’s biggest coffee maker, which derives about a fifth of its $100 billion in sales from java, faces a new number two after Mondelez International Inc. agreed to combine its coffee unit with its D.E Master Blenders 1753 BV. The new company, Jacobs Douwe Egberts, is the latest step by Master Blenders owner JAB Holding Co. to create a caffeine-fueled global powerhouse in one of the few vibrant areas of the $1 trillion food and beverage sector.

That creates headaches for Vevey, Switzerland-based Nestle, whose coffee business has slowed of late after driving revenue and margin expansion for much of the past decade. Sales growth at the unit that includes most of the coffee portfolio has halved, while the single-serve Nespresso division has lost market share to copycats in Europe and failed to make a dent in the U.S.

“Nestle now has proper competition just at a time when they’re struggling,” Jonny Forsyth, an analyst at Mintel, said in a phone interview. “They should be worried.” Nestle declined to comment on the new company.

The combination is the largest in an industry that has rapidly consolidated in the past five years, with more than 100 deals worth almost $23 billion, according to data compiled by Bloomberg. The largest of those deals was Master Blenders takeover by JAB last year.

 

Eoin Treacy's view -

In many respects coffee is a beverage consumed by the middle classes. Consumption has increased over the last decade and is likely to increase further. The consolidation of the sector suggests that related companies are well aware of this fact and they have been competing to gain the critical mass necessary for global expansion. 

Mondelez International’s partnership with D.E Master Blenders can be viewed as a positive for both companies. Quite how much of a threat to Nestle it represents remains open to question. After all, it might be competitive but the sector remains on a strong growth trajectory. 

 

 



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May 06 2014

Commentary by Eoin Treacy

Bayer to Buy Merck Consumer-Health Unit for $14.2 Billion

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

Buying the Merck unit adds the allergy medicine Claritin and Coppertone sunblock to a Bayer portfolio anchored by the iconic pain pill aspirin. Bayer, based in Leverkusen, Germany, had 3.9 billion euros ($5.4 billion) in sales of non- prescription medicines last year, accounting for about 9.7 percent of the drug and chemical conglomerate’s revenue.

“We are strong in the over-the-counter business with Bayer aspirin and other products, so this was a great opportunity for us to strengthen the business and truly become a global leader,” Chief Executive Officer Marijn Dekkers said in an interview with Bloomberg Television.

Bayer ranks second in over-the-counter drugs by sales, behind Johnson & Johnson, according to a ranking compiled by the German company. After the Bayer-Merck transaction closes and Glaxo and Novartis form their venture, that venture will be the largest, followed by Bayer and then J&J, according to Bayer.

Eoin Treacy's view -

The pace of M&A activity in the healthcare sector continues to increase. While an argument continues to run in the bond markets over when interest rates will begin to rise and what effect that will have on borrowing costs, corporations are clearly voting with their wallets. They appear more willing to pay reasonably high prices with cheap credit rather than wait for the possibility of lower prices but perhaps more expensive funding.

The consumer and large cap pharmaceuticals sector had been mostly rangebound over the last year but as the wider market has ranged, these sectors have moved to positions of outperformance.

 



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May 02 2014

Commentary by Eoin Treacy

Email of the day on Energy, Bank Capital & Cars

Have you noticed US oil producers are having trouble capitalising on these higher global Oil prices.  We both agree the world needs a cheap energy.  I think it is unlikely that cheap energy source will be conventional or unconventional Oil and Gas.  My concern is that cheap energy solution may take another 10 years to materialise.

I still think European banking looks like Zombie banking.  We know European banks have capital deficiencies.  I think these banks are holding back a broad recovery in the European economy.  My sources continue to tell me European banks are still trying to shrink balance sheets.  I believe the ECB needs to be more proactive in solving this problem.  I see ECB is talking of QE - I am not sure this idea is the solution more likely the problem.   However the bank capital dilemma needs to be addressed quickly otherwise Europe faces a possible Japanese situation of low growth for decades.

Like you I am a strong believer in the big European global business brands and product solutions.  However the availability of credit is stifling growth in Europe's smaller companies and businesses.   From what I observe VW increasingly looks like it is going to dominate the global car industry.  Unless Toyota can catch up in this technology race they will lose their cherished Crown of the dominate global car producer.  As for old world car companies Ford , GM etc. sadly they look like a great short to me.  Every time I hire rental car in the US I come away with the thought how do US car companies do it so badly and remain in business.  I don't expect US cars to handle like my Porsche but US cars are just plain scary to drive.

Please keep up the good service.

Eoin Treacy's view -

Thank you for sharing your perspective on a range of topics. The revolution in unconventional supply of oil and gas can be viewed in terms of a supply response to high prices. At the beginning of the last decade $40 was considered the highest price possible for oil with the result that a great deal of additional supply was simply uneconomic.

Canadian bitumen becomes economic in the region of $40. Generally speaking more established offshore oil fields, such as the North Sea, have a breakeven in the region of $20-$25 while newer offshore such as Brazil’s pre salt ultra-deep water fields comes in closer to $45. A number of the unconventional plays have breakevens closer to the $50-60 area. As a result, we can conclude that price is the determining factor in which sources of potential supply are ultimately moved into production. 



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May 02 2014

Commentary by Eoin Treacy

Bitter Taste of Cadbury Guides U.K. Stance on Pfizer-AstraZeneca

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

Even after Pfizer’s 63.1 billion-pound ($106.5 billion) sweetened offer for AstraZeneca was rejected, the government said it was pressing Pfizer for assurances on jobs and the U.K.’s place as a center for the life-sciences industry. The government will carefully weigh Pfizer’s proposals to see “whether they offer sufficient protection of our priorities,” Cameron’s office said today.

Eoin Treacy's view -

The fact that Astra Zeneca shares held their gain following the refusal of Pfizer’s offer suggests investors believe the acquisition will eventually be successful. Europe is proving a fertile hunting ground for well-capitalised US companies in search of acquisitions. GE’s attempt to acquire Alstom’s core power plant unit represents another such example. Considering the relative difference in valuations between the two continents, this trend is likely to continue.  



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April 29 2014

Commentary by Eoin Treacy

Africa: A ripe opportunity

Understanding the pharmaceutical market opportunity and developing sustainable business models in Africa This report by IMS Health is highly educative and I regard it as a must read for anyone interested in Africa. Here is a section:

By 2016, pharmaceutical spending in Africa is expected to reach US$30 billion.  This value is driven by a 10.6% compound annual growth rate (CAGR) through 2016, second only to Asia Pacific (12.5%) and in line with Latin America (10.5%) during this period. Spurred by a convergence of demographic changes, increased wealth and healthcare investment, and rising demand for drugs to treat chronic diseases, this market potentially represents a US$45 billion opportunity by 2020. 

The pharmaceutical growth is a reflection of economic strength accompanied by increasing healthcare spending. Sub-Saharan Africa (SSA), excluding South Africa, is notable in this regard: according to the Economist Intelligence Unit, its economies are growing faster than anywhere else in the world and this trend is expected to continue.

The appeal of Africa lies not in its size – the continent accounts for just 3% of the global economy – but in the dynamics that drive sustainable growth at a time when the major established pharmaceutical markets face a more uncertain future. Underpinning these prospects are a series of positive economic trends: greater political and fiscal stability and improvements in pro-business legislation have led the United Nations (UN) to forecast that Foreign Direct Investment (FDI) in Africa could more than double by 2014, despite speculative money leaving the continent following the collapse of Lehman Brothers, and the Arab Spring restricting investment in North Africa.

This FDI is fuelling macroeconomic growth and vastly improving access to new technology. The recent boom in mobile subscribers reflects this trend: as of mid-2012, there were more than 600 million mobile subscribers on the continent, surpassing American and European figures. At the same time, major demographic shifts show an increasing number of working-age Africans, a rising middle class which accounts for 34% of the continent’s inhabitants, and an urban population expected to exceed that of China’s and India’s by 2050.

 

Eoin Treacy's view -

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

IMS Health recently IPOed in New York. The company which specialises in crunching complicated prescription data in order to sell it to pharmaceutical companies represents one of a new breed of information companies that are likely to become more common in the coming decades as big data moves into the mainstream. While they do not generate revenues in Africa, one can understand why the continent represents an interesting opportunity for them. 

According to this report GlaxoSmithKline is the dominant provider of pharmaceuticals in Africa. However, with annual revenues of £30 billion the 3.8% represented by the Middle East and Africa barely moves the needle in terms of the share’s performance. Nevertheless, as a global Autonomy GSK represents one of the companies most likely to benefit from the continued evolution of the global consumer. The share (Est P/E 15.38, DY 5.2%) has been largely rangebound for much of the last year but a sustained move below 1500p would be required to question medium-term scope for additional upside. 

South African listed Aspen Pharmacare generates 35.5% of its revenue in South Africa and 10.2% in the rest of Africa. The share (Est P/E 25.48, DY0.56%) has lost momentum following an accelerated advance in September and it will need to continue to hold above or in the region of the 200-day MA if medium-term upside potential is to continue to be given the benefit of the doubt. 

Africa has been one of the more fashionable destinations for investors over the last few years with the result that prominent regional shares now have rather expensive valuations. For example the UK listed Africa Opportunities Fund which invests directly in Sub Saharan Africa’s less liquid markets traded on a discount to NAV of 18% in early 2012. Following an impressive advance it now trades at a 2% premium and appears to be unwinding an overbought condition relative to the 200-day MA. 



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April 17 2014

Commentary by Eoin Treacy

Email of the day on the health of the global middle class

“Does the following analysis in the FT raise questions about a central plank our your argument in favour of a long term secular bull market in Autonomies?” 

Eoin Treacy's view -

Thank you for this question which others may also have an interest in. Here is a section:

In an interview, Kaushik Basu, the World Bank’s chief economist, warned that many of those people who had emerged from poverty in recent years remained “very vulnerable” to slipping back. He also said the world economy faced risks, including the possibility that China’s growth could slow even more than it has already, something that would have big repercussions for the developing world.

Even if that risk did not materialise, Mr Basu said, current growth would not be enough to return to the sort of poverty reduction seen in recent decades.

To make up for that, he said, “governments need to do more, much more, in terms of structural reforms in developing countries”.



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March 13 2014

Commentary by Eoin Treacy

Irish Economy shrinks sharply at end of 2013

This article by Eoin Burke Kennedy for the Irish Times may be of interest to subscribers. Here is a section: 

Merrion economist Alan McQuaid said: “We wouldn’t read too much into the GDP data. In our view they are understating the true health of the economy at this juncture given the huge improvement we’ve seen in employment in the past year, with GNP a better barometer.”

He said much of Ireland’s problems last year stemmed from the expiry of patents in the key pharmaceutical sector, which depressed merchandise exports overall.

However, he noted services exports remained resilient and were 7.1 per cent higher year-on-year in the fourth quarter.

Davy Stockbrokers said the data contained “a mish-mash of revisions and volatility - largely related to the pharmaceutical sector - so it is difficult to see through the statistical fog.”

 

Eoin Treacy's view -

One of the main drivers of Ireland’s recovery remains the fact that it plays host to the European headquarters of a significant number of Fortune 500 companies. This has helped ensure Ireland benefits from export led growth while a number of other troubled Eurozone peripheral nations have struggled. The pharmaceutical sector has historically played an important role as both an employer and exporter but the emergence of generic drugs has been a challenge for the Irish operations which had previously relied on patent protection.

An idiosyncrasy of the Irish stock market is that none of the foreign multinationals with operations in the country sustain listings in Dublin. CRH (23.5%), Ryanair (15.8%) and Kerry Group (13.4%) represent 50% of the domestic Index. The ISEQ has been among the best performing European indices over the last year but is currently somewhat overextended and a reversion towards the 200-day MA appears to be underway. 

 



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February 19 2014

Commentary by Eoin Treacy

China Cement, Sweet spot in the super cycle

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

Supply growth for cement has reached an inflection point The supply outlook looks particularly attractive with net supply growth of 1.9% and -4.0% for FY14/15E, as the cement sector faces the toughest measures in its history to rein in overcapacity. The State Council has issued guidelines under Document 41 to ban new supply approvals, control land and credit availability and to remove 32.5 grade (low quality) cement. The Clean Air Action Plan and new cement emission standards provide a catalyst for obsolete capacity removal and consolidation. We also see a more rational supply response being driven by 1) CNBM’s diminishing potential in M&A, and 2) economic returns for new plants that look low, notwithstanding our view of the cycle.

Moderate demand growth to absorb excess capacity
Cement demand should moderate to c.5% CAGR in the next five years, declining from a high of 9.6% in 2013. Urbanization should continue to drive cement demand particularly in Western China. While investors are concerned about China’s high cement consumption per capita, our study of developed countries shows that urbanization rates correlated strongly with cement consumption per capita until urbanization rates reached c.70-80%. China’s urbanization rate will not reach this level for 10-15 years.

Structurally higher margins in the long run
Most would view 2011 as the peak of the cycle with industry margins at unit GP of RMB87/t and bellwether Conch achieving GP of RMB123/t. However, we believe there is room to exceed this in the next few years given the structurally better supply-demand. This is helped by structurally lower coal prices, now 40% below the 2011 peak. With more aggressive consolidation ahead, this should provide support for higher margins. 

Eoin Treacy's view -

The full report is posted in the Subscriber's Area.

At the Singapore venue for The Chart Seminar last week, we discussed the outlook for cement companies and other materials companies based on the fact that expectations are low and chart patterns generally supportive of a recovery hypothesis.

Anhui Conch is trading in the region of the upper side of a two-year range and will need to continue to hold above the 200-day MA if medium-term potential for additional upside is to continue to be given the benefit of the doubt.

China Resources Cement Holdings found support in the region of the 200-day MA from January and broke out to new 18-month highs two weeks ago. A sustained move below HK$5.25 would be required to question medium-term scope for additional upside.

Taiwan Cement Corp has a broadly similar pattern to the TAIEX and most recently found support in the region of 200-day MA from early February. A sustained move below TW$42 would be required to question medium-term potential for additional upside.

While not covered in the above report, German listed Heidelberg Cement is forming first step above its base while Irish and UK listed CRH has held a progression higher reaction lows since late 2011. 



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January 21 2014

Commentary by Eoin Treacy

AB InBev to Pay $5.8 Billion for Korean Oriental Brewery

This article by Frank Longid and Clementine Fletcher for Bloomberg may be of interest to subscribers. Here is a section: 

“On the surface, the deal seems odd as they’re paying more than three times for Oriental than what they sold the business for five years ago," said Pablo Zuanic, an analyst at Liberum Capital. “However, this signals to us they see growth in South Korea -- not so much in terms of market growth, but to improve share and drive the penetration of Budweiser and Corona.”

Korea’s beer market has grown about 2 percent a year from 2009 through 2012, the companies said. AB InBev plans to further develop Cass as well as throw its marketing support behind brands including Budweiser, Corona and Hoegaarden in the market.

Eoin Treacy's view -

It must be pretty galling for AB InBev to pay such a hefty price for an asset they sold less than a decade ago for a fraction of the price. What this story and last week’s announcement that Santory is attempting to purchase Beam Inc highlight how reliant the global alcoholic drinks market is on brand recognition. As a result companies tend to pay for growth.

This trend suggests the consolidation of brands within the drinks sector remains a significant theme. Brown Forman, an S&P500 Dividend Aristocrat yielding 1.75%, surged on news of the bid for Beam probably on the assumption that it is next in line for an offer.

 



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January 16 2014

Commentary by Eoin Treacy

Nu Skin Plunges After China Says It Will Probe Its Operations

This article by Lauren Coleman-Lochner and Rachel Butt for Bloomberg may be of interest to subscribers. Here is a section: 

Scott Van Winkle, an analyst at Canaccord Genuity Inc., today cut his recommendation on the stock to hold, from buy, saying the Chinese market is large enough to significantly affect Nu Skin's results and valuation.

Network marketers such as Nu Skin have always been questioned, "causing outsized share price movements," Olivia Tong, an analyst at Bank of America Corp., wrote in a note yesterday. "There does not seem to be tangible evidence to validate negative claims targeted at the company thus far".

 

Eoin Treacy's view -

Nu Skin Enterprises derives almost 80% of its revenue from Asia where demand for its products is high and door to door selling meets with less social resistance. Given the incentive programs and networking strategies employed by such companies, there is a fine line between what might be construed as pyramid selling and the momentum driven sales process as it is currently structured.  



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January 13 2014

Commentary by David Fuller

The MINTs are very different and might not all see stellar growth

In rapidly developing countries, often the proceeds of economic growth fail to flow adequately to shareholders – particularly foreign ones

Here is a latter section from this informative column by Roger Bootle for The Telegraph:

 Although each of the MINT countries will probably do pretty well over the years ahead, with Indonesia in particular perhaps capable of 7pc growth, these countries do not stand out from others in their respective regions.

Although Mexico could be the growth leader in Latin America, in South-East Asia, the Philippines and Vietnam have exceptional growth prospects, and in Africa, Kenya and possibly even Egypt do - the latter if it could get itself sorted out. Meanwhile, in Europe, Poland has good prospects, although probably not quite as good as Turkey’s.

Talk of growth prospects naturally leads people to dream of spectacular returns in the stockmarket. Last year the Nigerian market put in a stellar performance – up by nearly 50pc over the year – but equity markets in the other three MINTs fell over the year.

It must always be remembered that, for a variety of reasons, the link between economic growth and stock market returns is not always that strong.

The often widely divergent performance of the Chinese economy and stock market is a salutary example.

How a market is valued in the first place is a key consideration. Moreover, in rapidly developing countries, often the proceeds of economic growth fail to flow adequately to shareholders – particularly foreign ones.

Of the four economies, I am fairly optimistic about the immediate economic outlook for Mexico and Nigeria. But beware: that might not translate into large rises in share prices this year – or indeed in the near future. To make a mint you have to coin it.

David Fuller's view -

The acronyms such as BRIC and MINT are of little value for these diverse developing and frontier markets, as Roger Bootle points out.  They have also become tedious with time. 

This item continues in the Subscriber's Area.



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January 13 2014

Commentary by Eoin Treacy

Sanusi Lamido Explodes: How vested interests are killing Nigeria

This transcript of a speech by Sanusi Lamido Sanusi, the governor of Nigeria¡¯s  central bank, to TEDxYouth in August and now posted by Premium Times may be of interest to subscribers. Here is a section: 

But my experience with the banking reforms, and how it affects the fear of vested interest is as the following.

After we discovered the things that happened in the banks, the critical thing we had to do was to take a decision that would pitch us against powerful political and economic forces.

We were dealing with chief executives that in 2009 had become invincible. They were in the seat of power. They had economic power and they had bought political protection. They were into political parties, they had financed elections of officers and they believed that nobody could touch them.

And every time I said it was time for us to take action, people said to me you can?¡¥t touch these people, you'll be sacked. Or you can't touch these people they will kill you. Or you can't touch these people, you can't do that.

And I said you know what? We are going to take them on.

And we took the decision. We're going to remove them. You know what? We removed them and nothing happened.

We're going to prosecute them, we're going to put them in jail. And we put one of them in jail.

And we are going to recover these assets. Because the way the central bank operated in the past, these guys take all this money and the central bank says "the bank has failed".

The banks that we saved had 4.4 trillion naira in deposits. They had eight to ten million customers. But the government and the system has always berthed on the side of the rich people.

Because these eight million customers, the old woman in Gboko or in Yenagoa, or Maiduguri, who has been told to save her money and who?¡¥s saved money for 40-50 years wakes up one day and all her savings are gone.

The civil servants who've saved for 35-40 years, kept his pension money in the bank, the school fees of his children, their medical bills, wakes up one day and he finds that his bank is barricaded because the bank has failed.

Banks do not fail.

When people say banks have failed, it''s like saying a man whose throat has been slit and you say the man died. He did not die, he was killed.

Eoin Treacy's view -

Standards of governance enter just about every discussion on Africa. This is not surprising since the level of corruption, political instability and wars are what make the headlines. However, the fact that we are now seeing high profile public officials throwing light on these issues, not as insurmountable but as challenges is noteworthy. Let us then ask ourselves are standards of governance improving or deteriorating? I have to conclude that they are improving, albeit from a very low base. 



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December 18 2013

Commentary by Eoin Treacy

BRICs Creator ONeill Wowed by New Lulas Success

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

Pena Nieto, 47, wasted little time pushing his agenda after taking office a year ago. On his second day on the job, he signed a pact with the two biggest opposition parties to pursue legislative proposals to spur economic growth.

The reform agenda has drawn praise from Pacific Investment Management Co.¡¯s Bill Gross, BlackRock Inc. Chief Executive Officer Laurence D. Fink and former U.S. Treasury Secretary Lawrence Summers. O¡¯Neill says the legislative victories put Pena Nieto in position to be the decade¡¯s most successful policy maker from the Group of 20 nations, a title he gave to Brazilian President Luiz Inacio Lula da Silva in the past decade.

Changes he implemented include forcing teachers to undergo annual evaluations and curbing the market power of dominant telecommunications companies such as billionaire Carlos Slim¡¯s America Movil SAB. He also signed measures to encourage banks to lend more and added taxes on dog food, soda pop and high-calorie snacks in an attempt to reduce the government¡¯s dependence on oil revenue.

 

Eoin Treacy's view -

While Mexico's reputation abroad has been tarnished by media reports of drug related violence, this may also have helped to foster resolve to support reforms. From my new home in Los Angeles, I look forward to visiting Mexico and seeing for myself how these measures are having an effect on the ground. 

 



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December 17 2013

Commentary by Eoin Treacy

Chocolate Eaters Drive Record Cocoa Output Deficit

This article by Luzi Ann Javier, Marvin G. Perez and Isis Almeida for Bloomberg may be of interest to subscribers. Here is a section: 

Global sales of chocolate confectionary will gain 2.1 percent to a record 7.3 million tons next year, after a 2 percent gain in 2013, estimates Euromonitor International Ltd. Sales in China more than doubled in the past decade, outpacing gains in Western Europe, the biggest consumer. Tighter supplies will mean higher costs for food makers including Nestle SA, Barry Callebaut AG and Lindt & Spruengli AG.

"Demand for chocolate is great" said Ashmead Pringle, the president of Atlanta-based GreenHaven Commodity Services, which oversees about $340 million. "A lot of the world population is moving to the middle class and will have more money to spend, in particular in emerging markets and Asia"

 

Eoin Treacy's view -

Cocoa exhibits one of the firmer chart patterns within the commodity complex and has been supported by disappointing crops in West Africa as well as continued growth in demand. Since the life cycle of the cocoa tree involves five years from sapling to pod production, increasing supply represents a medium-term challenge. 
 

 



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December 16 2013

Commentary by Eoin Treacy

On Target on diabetes

Thanks to Martin Spring for this edition of his ever topical report. Here is a section on diabetes:

 

Unless the condition is controlled, the consequences are very unpleasant. Complications include problems with the eyes, kidneys, cardio-vascular system and the nervous system. The mortality rate for sufferers under 60 averages 28 per cent in Europe, 38 per cent in North America and the Caribbean.

The root cause is well known. Most people who develop the more common form of diabetes, type 2, are eating more calories than their bodies are using.

According to the US Centers for Disease Control, diet and exercise changes can more than halve the risk of pre-diabetic conditions such as elevated blood sugar content developing into diabetes type 2.

Diabetes cannot be cured, but it can be controlled through weight loss, low-carb diets, exercise, and a range of medical treatments.

The most important drug is synthetic insulin, which is injected into the bloodstream to compensate for the shortage of the pancreatic hormone.

Eoin Treacy's view -

Diabetes is a global epidemic, particularly for people whose ancestors subsisted on a scarcity of calories. This is particularly poignant for India and China where rising incomes are fuelling growth in snack foods with high sugar content. Since the disease is a chronic condition rather than something that can be cured, it can also be considered a growth industry, regardless of how personally distasteful that way of viewing the world might be. 



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December 05 2013

Commentary by Eoin Treacy

Herbalife Audit Will Clear Borrowing for Buyback Bass Says

This article by Saijel Kishan and Leslie Patton for Bloomberg may be of interest to subscribers. Here is a section:

Once the Grand Cayman-based company completes its three- year audit in the next 60 days, it will be able to access capital markets and borrow 2.5 times earnings before interest, taxes, depreciation and amortization, he said today in a Bloomberg Television interview with Stephanie Ruhle.
     
“We’re catalyst-driven investors, and in this case the catalyst is coming in the next 60 days when they have their three-year audit done,” Bass said, adding that Herbalife is a business that generates “significant” cash flows, has no debt and is growing. Dallas-based Hayman owned about 436,000 Herbalife shares, or 0.4 percent of the stock outstanding, as of Sept. 30, according to data compiled by Bloomberg.

Herbalife has recently been under scrutiny amid allegations by hedge-fund manager Bill Ackman that the company is a pyramid scheme. While Herbalife has consistently denied Ackman’s claims, the activist investor last month said he will take his bet against the company “to the end of the earth.”

Eoin Treacy's view -

Few companies have gained such notoriety as a result of their sales strategy as Herbalife, but regardless of whether one agrees or not, there is no denying that the company makes money.



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December 04 2013

Commentary by Eoin Treacy

Yum Sees Tripling India Store Count to About 2,000 by 2020

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

Yum says at investor meeting that KFC stores in India avg $1m annual sales.
Pizza Hut testing cafe store concept in India
Pizza Hut delivery in China ¡°in early days of growth¡±
Says Chinese govt investing in infrastructure
YUM sees ¡°huge opportunity¡± for KFC in France and Germany

 

Eoin Treacy's view -

Few companies have been as successful in adapting to foreign markets as Yum Brands. As a result the company generates more revenue from China that the USA and the difference in product offerings between the two jurisdictions is a significant influence on that figure. 
 

 



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December 02 2013

Commentary by Eoin Treacy

Asia's Frontier Economies - Plenty of Alpha

Thanks to a subscriber for this informative report highlighting the fact that while Africa is often associated with frontier markets, it is by no means the only continent with such high growth opportunities. Here is a section: 

The economies in this study vary widely in size, but three already have nominal GDP amounting to more than USD100bn, namely Bangladesh, Pakistan, and Vietnam. Indeed, these three economies have a combined GDP of nearly half a trillion dollars and population of half a billion. These are hefty figures even by EM standards, and the scale alone is sufficient to keep investors interested in the coming years.

Two other economies in this study, Myanmar and Sri Lanka, offer potential scale (both likely to become USD100bn economies by 2018) and fast growth rates. The former is coming out of decades in economic seclusion, while the latter is recovering from a multidecade civil war. Myanmar, if governed prudently, offers exciting opportunities for investors given its large population (64 million), extensive natural resource base, and low wages. Sri Lanka, already endowed with some of the most educated work force in the region and world class tourist destinations, could well be on the cusp of a sharp acceleration in growth, provided governance improves and the security situation remains stable.

Eoin Treacy's view -

While small markets suffer from issues of liquidity they also represent opportunities where improving governance can have outsized results in terms of stock market performance. As an increasing number of countries rise to the challenge of catering to the needs of large young populations by adopting capitalism, embracing globalisation and introducing market reforms, the outlook for growth continues to improve. 



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November 25 2013

Commentary by David Fuller

Tim Price: Madness, and sanity

My thanks to the author for his ever-interesting letter, published by PFP Wealth Management. It is posted in the Subscriber's Area but here is a brief sample:

Probably the biggest of those fish is that giant part of the world economy known as Asia. The chart below shows the anticipated growth in numbers of the middle class throughout the world over the next two decades. The solid green circle is the current middle class population (or as at 2009 to be precise); the wider blue-fringed circle represents the forecast size of this population in 20 years' time. The OECD definition of middle class is those households with daily per capita expenditures of between $10 and $100 in purchasing power parity terms.

Note that in the US and Europe, the size of the middle class is barely expected to change over the next two decades. Central and South America, and the Middle East and North Africa, are forecast to grow a little. But one area stands out: the emerging middle class in Asia is forecast to explode, from roughly 500 million to some 3 billion people.

In equity investing, the combination of a compelling secular growth story and compellingly attractive valuations is a very rare thing, the sort of investment opportunity that one might only see once or twice in a generation, if that. But it exists, here in Asia, today. Once again, however, we have to abandon conventional financial thinking in order to exploit it.

David Fuller's view -

This is a very good issue of Tim Prices' letter and I commend it to you.



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August 29 2013

Commentary by Eoin Treacy

Generic drugs

Eoin Treacy's view -

The generic drug sector is dominated by a relatively small number of countries not least India, Israel and the USA. Heightened currency market volatility is likely to be of benefit to Indian manufacturers since the Rupee's weakness will enhance consolidated earnings for these global businesses.

Among foreign listed Indian generic drug makers Ranbaxy has a listing on London's International Exchange and generates 81% of its revenue from outside India. The share has fallen from $14 to $4 since 2010 and posted a large upward dynamic last week. It is currently unwinding its overextension relative to the 200-day MA but will need to find support at progressively higher levels if recovery is to be given the benefit of the doubt.



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