Investment Themes - Global Middle Class

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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. 

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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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