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Weekly Equity Review
Ucap Hong Kong Asset Management Limited
19th Jul 2016
Equity Strategy Highlights
� Global Markets Highlights
� Markets continue to rise, driven up by valuations gains in a low rate environment and probably by the
low risk level of portfolios. In the meantime earnings growth remains negative.
� The coming publications and management comments will be very important to see whether earnings
may catch up with valuations in the coming months.
� More European companies report on a semi-annual basis than on a quarterly basis so Q2 earnings in
Europe are traditionally much more significant than Q1 earnings.
� US banks earnings were reassuring. Investors now await some major publications this week such as
Microsoft, Intel and Johnson & Johnson.
� Important Events This Week
� Tuesday: US Housing starts
� Wednesday: EU Consumer Confidence
� Thursday: ECB Meeting, US Jobless Claims, US Home Sales
� Friday: Markit US and Europe manufacturing PMIs
19 July, 2016
Equity Strategy Highlights
� Global Leaders – 2016
� The US portfolio is still lagging. Our US Global Leaders portfolio suffers from exactly the same issue as the
market is driven by 2015 laggards and purely interest rate related stocks such as utilities. We continue to
believe that companies with robust growth profile and strong cash flow generation will ultimately
perform better over the long-term.
� The European Portfolio remains very strong compared to indices.
� Europe: 0.8% YTD vs Euro Stoxx at -6.4% YTD (7.2% alpha).
� US: 3.2% YTD vs S&P at 7.0% YTD (-3.8% alpha).
� Stock-Picking List – 2016
� The average performance of our Stock-Picking YTD is +0.47%. The average alpha is +238 bps.
� We have closed positions for the time being.
19 July, 2016
Q2 EARNINGS SEASON
19 July, 2016
Q2 Earnings Season
19 July, 2016
The following chart shows the Q1 earnings distribution for the S&P 500 and the S&P 350.
$-
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
11 July 18 July 25 July 01 August 08 August 15 August
Earnings date distribution by week, weighted by market capitalization (in $Bn)
S&P 500
S&P Europe 350
Banks Q2 Earnings
� Bank earnings have so far topped analysts’ expectations benefitting from higher trading revenue
and lower costs. Net interest margins continue to shrink and most banks do not expect an
interest rate hike this year after the Brexit.
� JPMorgan beat analysts’ expectations on strong performance from its trading business that saw revenue
in bonds and currencies jump 35%. On top of this, loans grew by 14% marking its third consecutive
quarter of double digit growth. Investment banking fees fell 10%.
� Wells Fargo, the bank with the least exposure to trading and investment banking of the big banks in the
US, reported earnings that were in line with expectations. The bank grew its loan book by 7.7% to
$957bn and expects strong growth in mortgage origination in the coming quarter.
� Citi posted the steepest drop in revenue and earnings among the four banks that have already reported.
Yet, the bank easily beat expectations on strong loan and trading revenue growth couple with lower
expenses.
� Bank of America beat earnings expectations as bond, currency and commodity trading revenue rise of
22% helped offset lower equity trading revenue. The bank has also benefitted from lower costs that fell
3.3% YoY.
19 July, 2016
FED Rate Hike
19 July, 2016
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Probabilities of a Rate Hike in December
June job report.
The likelihood of a rate hike has jumped from 20% on July 8th to almost 45% as of Friday
following a strong job report for the month of June and bank earnings that have so far
topped expectations.
Banks may catch up in H2 2016
� Banks have been one of the major laggards of the S&P 500 given market turmoil at the beginning
of the year, the low interest rate environment, the Brexit and the implications these had on
capital markets and the shrinking of NIMs (net interest margins).
� Despite the sectors relative high dividend yield (2.27% avg. among the five biggest US banks), investors
have favored utility and consumer staple stocks given their defensive and low volatility aspect along with
their stable outlook.
� Chances for a rate hike now stand at almost 45% in December and the US yield curve has stabilized.
� In that environment, banks should catch up with the broader market.
� Financials represent a cheaper source of dividend yield and capital return.
� Banks in the US have increased their excess capital by 60% compared to 2015.
� They have produced the largest increase in total yield (dividend plus buybacks as a % of market cap.) in the past year.
� The low valuation at todays levels (avg. book value of 0.87), would mark a good entry point for long-term
investors.
19 July, 2016
Other Notable Earnings
� Netflix’s earnings topped estimates but plunged in after-hours trading on slow subscriber growth that fell
to its lowest level in two years. On top of this, the company said it was affected by a recent increase in
the price of the service that led to many subscriber cancellations.
� Yahoo! dropped slightly after-hours as revenue fell for the sixth time in seven quarters and earnings fell
short of estimates. The company incurred a large write-down of Tumblr.
� EMC reported strong earnings after-hours as the company is in the process of being acquired by Dell. Its
partially owned subsidiary VMWare jumped 9% after market on strong sales in Cloud and SDN (Software
Defined Network) solutions.
� IBM’s better-than-expected earnings were boosted by growth in its cloud computing and data analytics
business that added customers such as Pratt & Whitney, Halliburton and Kaiser Permanente
� H&M sales rose 8% in June.
� Swatch reported profit that fell roughly 50% in the first half on weak Asian and European markets and a
strong Franc.
� SGS first half revenue came in line with analysts’ estimates, with expectations for margins to remain
pressured temporarily given its recent acquisitions.
19 July, 2016
INVESTMENT IDEAS
19 July, 2016
Global Leaders
19 July, 2016
The Global Leaders are quality companies that we believe are fit for a long-term investment.
We launched this strategy in August 2011. Please read our special report for a full explanation of this strategy.
Benchmark: S&P 500Benchmark: Euro Stoxx 50
� European Portfolio � US Portfolio
*Since
August 2011
Portfolio Benchmark Delta Annualized Portfolio Benchmark Delta Annualized
Performance 96% 58% 38.5% 15% Performance 115% 97% 18.0% 17%
Performance YTD 0.8% -6.4% 7.2% Performance YTD 3.2% 7.0% -3.8%
Volatility 49.3% 37.7% 11.6% Volatility 58% 52% 7%
Max DrawDown -53.9% -49.8% -4.1% Max DrawDown -55% -51% -5%
-15
5
25
45
65
85
105
125EU Global Leaders Benchmark
-10
10
30
50
70
90
110
130
US Global Leaders Benchmark
Global Leaders – Current List
� European Portfolio � US Portfolio
19 July, 2016
Name Weight Mkt Cap ($bn) Sector
Novo Nordisk 7.08% 141 Health Care
Sanofi 6.68% 103 Health Care
Inditex 6.61% 100 Consumer Discretionary
Nestlé 5.91% 239 Consumer Staples
Vinci 5.60% 44 Industrials
Fresenius 5.52% 40 Health Care
Unilever 5.29% 137 Consumer Staples
Essilor 5.13% 28 Health Care
BATS 5.10% 115 Consumer Staples
Philips 5.00% 24 Industrials
L'Oréal 4.99% 102 Consumer Staples
Dassault Systemes 4.80% 20 Information Technology
Reckitt Benckiser 4.62% 70 Consumer Staples
Roche 3.87% 217 Health Care
Ab InBev 3.82% 202 Consumer Staples
Novartis 3.79% 199 Health Care
LVMH 3.20% 84 Consumer Discretionary
Allianz 3.10% 72 Financials
AXA 2.97% 58 Financials
Heineken 2.93% 54 Consumer Staples
Daimler 2.05% 72 Consumer Discretionary
BMW 1.95% 55 Consumer Discretionary
Name Weight Mkt Cap ($bn) Ticker
Johnson & Johnson 5.10% 333 Health Care
Exxon Mobil 5.05% 389 Energy
Apple 4.92% 525 Information Technology
Microsoft 4.92% 402 Information Technology
Alphabet 4.86% 483 Information Technology
Facebook 4.66% 326 Information Technology
Merck & Co. 4.63% 160 Health Care
PepsiCo 4.60% 152 Consumer Staples
Bristol-Myers Squibb 4.51% 123 Health Care
JPMorgan 4.42% 224 Financials
Costco 4.39% 68 Consumer Staples
Starbucks 4.31% 83 Consumer Discretionary
Honeywell 4.28% 88 Industrials
Nike 4.11% 93 Consumer Discretionary
Accenture 4.01% 74 Information Technology
AT&T 2.60% 267 Telecommunication Services
Verizon 2.57% 229 Telecommunication Services
Amazon 2.46% 342 Consumer Discretionary
Altria 2.36% 135 Consumer Staples
Philip Morris 2.27% 157 Consumer Staples
Walgreens 2.24% 89 Consumer Staples
Wells Fargo 2.23% 238 Financials
Reynolds 2.20% 76 Consumer Staples
Walt Disney 2.17% 159 Consumer Discretionary
Visa 2.15% 177 Information Technology
CVS 2.04% 102 Consumer Staples
Time Warner 2.03% 58 Consumer Discretionary
Mastercard 1.98% 97 Information Technology
Goldman Sachs 1.95% 64 Financials
Stock-Picking List – Performance
� Hit Ratio 35%
� Hit Ratio Alpha 58%
� Average Perf. 0.47%
� Average Alpha 2.38%
� Nb. of Trades 31
� Open Trades 0
19 July, 2016
Average alpha of each stock strategy when compared to its
index (S&P or Euro Stoxx) over the same holding period.
Average performance of each stock strategy.
Please ask for more details.
Latest Equity Research
19 July, 2016
Date Document Strategy Stocks Covered Date Document Strategy Stocks Covered
July 15, 2016 Key Highlight Global Leaders JPMorgan April 28, 2016 Key Highlight Global Leaders Facebook
July 12, 2016 Key Highlight Global Leaders Amazon April 27, 2016 Key Highlight Global Leaders Apple
July 8, 2016 Key Highlight Global Leaders PepsiCo April 22, 2016 Key Highlight Global Leaders Essilor
July 7, 2016 Key Highlight Global Leaders Walgreens April 20, 2016 Key Highlight Global Leaders Johnson & Johnson
July 4, 2016 Weekly Report Thematic View Nike, Under Armour April 14, 2016 Key Highlight Global Leaders JPMorgan
June 30, 2016 Key Highlight Thematic View JPMorgan, Goldman Sachs, Wells Fargo, Morgan Stanley, BoA April 13, 2016 Key Highlight Global Leaders Facebook
June 29, 2016 Key Highlight Global Leaders Nike April 5, 2016 Weekly Report Thematic View Ctrip, Expedia, Priceline
June 28, 2016 Weekly Report Global Leaders Reckitt Benckiser, Unilever April 1, 2016 SWOT Analysis Thematic View Ctrip
June 20, 2016 Company Primer Global Leaders Heineken April 1, 2016 SWOT Analysis Thematic View Expedia
June 16, 2016 Key Highlight Global Leaders Inditex April 1, 2016 SWOT Analysis Thematic View Priceline
June 14, 2016 Key Highlight Global Leaders Apple March 31, 2016 Key Highlight M&A Hon Hai
June 14, 2016 Weekly Report Global Leaders Accenture March 16, 2016 Key Highlight Global Leaders Apple
June 9, 2016 Company Primer Global Leaders Starbucks March 10, 2016 Key Highlight Global Leaders Inditex
June 9, 2016 Company Primer Global Leaders Facebook March 8, 2016 Weekly Report Thematic View 3M, GE, Honeywell, UTC
June 9, 2016 Company Primer Global Leaders Amazon March 7, 2016 Key Highlight Global Leaders Novo Nordisk
June 9, 2016 Company Primer Global Leaders Alphabet March 4, 2016 Key Highlight Global Leaders Time Warner
June 7, 2016 Key Highlight Thematic View Bristol-Myers, Juno Therapeutics, Kite Pharma February 23, 2016 Weekly Report Thematic View IBM
June 7, 2016 Weekly Report Tech Leaders Adobe, Broadcom, PayPal February 19, 2016 Key Highlight M&A IBM
June 3, 2016 Key Highlight Global Leaders Johnson & Johnson February 2, 2016 Key Highlight Global Leaders Alphabet
May 31, 2016 Weekly Report Global Leaders Alphabet, Amazon, Facebook January 29, 2016 Key Highlight Global Leaders Microsoft
May 27, 2016 Key Highlight Global Leaders Costco January 28, 2016 Key Highlight Global Leaders Facebook
May 24, 2016 Weekly Report Thematic View Swisscom, Deutsche Telekom, Vodafone, BT Group January 27, 2016 Key Highlight Global Leaders Apple
May 17, 2016 Weekly Report Thematic View Heineken January 25, 2016 Key Highlight Earnings Eiffage
May 11, 2016 Key Highlight Global Leaders Amazon January 15, 2016 Key Highlight Global Leaders JPMorgan
May 5, 2016 Key Highlight Global Leaders Time Warner January 13, 2016 Key Highlight Global Leaders Time Warner
May 4, 2016 Key Highlight Global Leaders CVS January 8, 2016 Key Highlight Global Leaders Walgreens
April 29, 2016 Key Highlight Global Leaders Amazon January 7, 2016 SWOT Analysis Thematic View Siemens
SECTOR VIEWS
19 July, 2016
Our Strategic Views – Sectors
19 July, 2016
GICS
SectorUS EUROPE
Information
Technology
US Technology remains the most attractive investment space in
terms of:
� Growth potential,
� Reasonable valuation,
� Potential cash return,
� Stock picking opportunities.
Stay long but the Tech sector is tiny in
Europe.
Financials
US Banks will ultimately benefit from the US economic recovery and
rising interest rates. The Brexit has a short term negative impact but
we believe that ultimately, US banks will came out stronger.
Rates seem to bottom and recent bank earnings have reassured,
and the sector may catch up in H2 2016.
European banks continue to face headwinds
from low rates and structural issues….
And the Brexit has worsened things … avoid
the sector.
Healthcare
Pharma are on multi-years upcycle:
� Earnings, M&A activity and positive drug developments continue to support the sector.
� Prices and valuations have risen, but the sector has lagged over the past quarters, offering investors an
attractive entry point.
Our Strategic Views – Sectors
19 July, 2016
GICS
SectorUS EUROPE
Consumer
Discretionary
Consumer Discretionary stocks benefit from the relatively resilient
US market. But valuation is a bit too high to warrant some further
outperformance.Those three sectors are heavily tilted
towards exporters.
Overweight Staples as they continue to be
supported by low rates and by weaker
European currencies following the Brexit.
Consumer
Staples
Consumer Staples are expensive but continue to be supported by
low US long rates.
IndustrialsOverweight as 2015 headwinds are abating. Stay long defense stocks
as geopolitical factors will keep the pressure on defense spending.
Energy Oil prices have stabilized but the CAPEX remain low. Stay long the integrated Big Oils but avoid services.
MaterialsCommodities remain under pressure due to declining emerging markets demand, overcapacity and a strong dollar.
-> Be careful with miners. Stay neutral chemicals.
UtilitiesStay Neutral as the sector is a play on long rates and other sectors
offer better fundamentals.
Avoid the sector as it is plagued by political
intervention in France and Germany.
Telecom
ServicesStay Long on low interest rates.
Stay Long on low interest rates and as the
weaker European currencies are supporting
some carriers.
Our Strategic Views - Sectors
19 July, 2016
The Following charts are a recap of our sector view as well as the relative size of each sector.
How to Invest
19 July, 2016
GICS Sector US EUROPE
Information
Technology
Best Investment proxy:
• Technology SPDR ETF (XLK).
Favorite Stocks:
• Payment Technologies: Visa, MasterCard, PayPal.
• Software: Microsoft, Adobe.
• Hardware: Apple.
• Media: Facebook, Alphabet.
• IT Services: Accenture, IBM.
Best Investment proxy: No Liquid Tracker.
Favorite Stocks:
• Software: Dassault Systèmes.
• Semis : ASML
Financials
Best Investment proxy:
• Financials SPDR ETF (XLF).
• Banks only: Banks SPDR ETF (KBE).
Favorite Stocks:
• Banks: JPMorgan, Wells Fargo, Goldman Sachs.
Best Investment proxy:
• Eurozone Banks: iShares Estoxx Banks ETF (SX7EEX
GY Index).
• Pan-European Banks: Lyxor Stoxx 600 Banks (BNK
FP).
Favorite Stocks:
• Insurance: Allianz, AXA.
Healthcare
Best Investment proxy:
• Healthcare SPDR ETF (XLV).
• Pharmas only: Pharmaceuticals SPDR ETF (XPH).
Favorite Stocks:
• Pharmaceuticals: Bristol-Myers, J&J, Merck.
Best Investment proxy:
• Lyxor Stoxx 600 Healthcare (HLT FP).
Favorite Stocks:
• Pharmaceuticals: Novo Nordisk, Roche, Sanofi.
• Equipment and Services: Fresenius, Essilor.
How to Invest
19 July, 2016
GICS Sector US EUROPE
Consumer
Discretionary
Best Investment proxy:
• Cons. Disc. SPDR ETF (XLY).
Favorite Stocks:
• Media: Disney, Time Warner.
• E-Commerce: Amazon, Priceline, Ctrip.
• Restaurant: Starbucks.
• Apparel: Nike.
Best Investment proxy:
• No Liquid Tracker.
Favorite Stocks:
• Apparel: Inditex, LVMH.
• Carmakers: BMW, Daimler.
Consumer Staples
Best Investment proxy:
• Cons. Staples SPDR ETF (XLP).
Favorite Stocks:
• Pharmacies: CVS, Walgreens.
• Food & Beverage: Pepsi.
• Packaged Food: Kraft Heinz, Mondelez, ConAgra,
Tyson.
• Tobacco: Altria, Reynolds.
• Retail: Costco, Wal-Mart, Kroger, Dollar Tree.
• Confectionary: Hershey.
Best Investment proxy:
• No Liquid Tracker.
Favorite Stocks:
• Food & Beverage: Nestlé, AB Inbev, Heineken,
Danone.
• HPC: Unilever, Reckitt, L'Oréal.
• Tobacco: BAT.
• Retail: Carrefour.
• Confectionary: Lindt, Barry Callebaut.
Industrials
Best Investment proxy:
• Industrials SPDR ETF (XLI).
Favorite Stocks:
• Conglomerates: GE, Honeywell, 3M, United Tech.
Best Investment proxy:
• No Liquid Tracker.
Favorite Stocks:
• Infrastructure: Vinci.
• Diversified: Philips.
How to Invest
19 July, 2016
GICS Sector US EUROPE
Energy
Best Investment proxy:
• Energy: Energy SPDR ETF (XLE).
• Oil services: Market Vectors Oil services ETF (OIH).
Favorite Stocks:
• Exploration & Production: Occidental, Hess, Noble
Energy, Anadarko.
• Oil Refining: Philips 66, Valero.
• Integrated: Exxon, Chevron.
• Equipment & Services: Schlumberger, Halliburton.
Best Investment proxy:
• No Liquid Tracker.
Favorite Stocks:
• Integrated: Total, RDSA.
• Refining: Neste OYJ.
Materials
Best Investment proxy:
• Materials: Materials SPDR ETF (XLB).
• Gold Miners: Market Vectors Gold Miners ETF
(GDX).
Favorite Stocks:
• Gold Miners: Newmont, Barrick Gold, Newcrest.
Best Investment proxy:
• No Liquid Tracker.
Favorite Stocks: na.
• Gold Miners: Randgold.
Utilities
Best Investment proxy:
• Utilities SPDR ETF (XLU).
Favorite Stocks: na.
Best Investment proxy:
• No Liquid Tracker.
Favorite Stocks: na.
Telecom Services
Best Investment proxy:
• No Liquid Tracker.
Favorite Stocks:
• Diversified: Verizon, AT&T.
Best Investment proxy:
• No Liquid Tracker.
Favorite Stocks:
• Diversified: Vodafone, Deutsche Telekom.
Disclaimer
19 July, 2016
Ucap Hong Kong Asset Management Ltd has issued this document for information purposes only. This document may not be distributed to the United States, Canada,
Australia or to any other jurisdiction in which its distribution is unlawful. If you require investment advice or wish to discuss the suitability of any investment decision,
you should contact your professional advisers for financial, legal or tax advice when appropriate. This document is not and should not be construed as an offer to sell or
a solicitation of an offer to purchase or subscribe for any investment or service.
Ucap Hong Kong Asset Management Ltd has based this document on information obtained from sources it believes to be reliable but which it has not independently
verified. Ucap Hong Kong Asset Management Ltd makes no guarantees, representations or warranties, and accepts no responsibility or liability as to its accuracy or
completeness. Expressions of opinion herein are subject to change without notice.
Members of the Ucap Hong Kong Asset Management Ltd and/or their officers, directors and employees may have positions in any securities mentioned in this
document (or any related investment) and may from time to time add to or dispose of any such securities (or investment).
In the case where this document is distributed in the United Kingdom by a person who is not authorized by the United Kingdom Financial Services Authority; it is only
intended for persons who (i) have professional experience in matters related to investments or (ii) are persons falling within Article 49(2)(a) to (d) ("high net worth
companies, unincorporated associations, etc") of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001 (as amended) or to whom it may
otherwise lawfully be communicated by such an unauthorized person (all such persons together being "relevant persons"). This communication must not be acted on
or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is available only to relevant persons and
will be engaged in only with relevant persons.
Past performance is not necessarily a guide to future performance. The value of any investment or income may go down as well as up and you may not receive back
the full amount invested. When an investment is denominated in a currency other than your local or reporting currency, changes in exchange rates may have an
adverse effect on the value, price or income of that investment. In the case of investments for which there is no recognized market, it may be difficult for investors to
sell their investments or to obtain reliable information about their value or the extent of the risk to which they are exposed. Investment in any market may be
extremely volatile and subject to sudden fluctuations of varying magnitude due to a wide range of direct and indirect, influences. Such characteristics can lead to
considerable losses being incurred by those exposed to such markets.
© Copyright. Ucap Hong Kong Asset Management Ltd 2015 ALL RIGHTS RESERVED
No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, whether electronic, mechanical, photocopying,
recording or otherwise, without the prior written permission of Ucap Hong Kong Asset Management Ltd.